Definition
Interest Coverage Ratio
The interest coverage ratio measures how many times a company's operating profit covers its interest expense, indicating its ability to service debt.
Calculated as EBIT (or sometimes EBITDA) divided by interest expense, it shows the cushion a company has to meet interest obligations from operating earnings. A ratio comfortably above one signals safety; a ratio near or below one warns of distress.
Lenders and bond investors watch interest coverage closely, often building covenants around it. A falling ratio, whether from declining profits or rising interest costs, is an early sign of credit stress and can presage default, restructuring or NPA classification by lenders.
Related terms
- Debt-to-Equity RatioThe debt-to-equity ratio compares a company's total borrowings to its shareholders' equity, gauging how leveraged (and risky) its balance sheet is.
- EBITDAEBITDA is earnings before interest, tax, depreciation, and amortisation, a measure of a company's core operating profitability.
- Debt Service Coverage Ratio (DSCR)The Debt Service Coverage Ratio measures a company's or project's cash available to service its total debt obligations, including both interest and principal repayment.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.