Interest Coverage Ratio
Operating profit relative to interest expense, measuring ability to service debt
What is Interest Coverage Ratio?
Interest coverage ratio shows how many times a business's operating profit covers its interest payments. It measures the ability to pay the interest on debt from earnings.
Lenders watch it closely, since a low ratio means little room for error if profits fall.
How this KPI is measured
- Function
- Finance
- Sub-function
- Treasury
- Industry
- All Industries
- Type
- Lagging
- Impact
- Risk
- Unit
- x
- Measurement frequency
- Quarterly / Annual
- Formula
- EBIT / Interest expense
How to calculate it
Divide earnings before interest and tax (EBIT) by interest expense.
For example, if EBIT is 12,000,000 and interest expense is 3,000,000, the ratio is 4.
A higher ratio means more comfortable cover. Lenders often set a minimum in loan agreements, so know your covenant level.
Where it is used
Assessing debt affordability
See ability to pay interest.
Meeting loan covenants
Track compliance.
Planning borrowing
Decide how much debt is sensible.
How to improve it
Tips and common mistakes
- Watch covenant levels.
- Variable-rate debt can lower cover when rates rise.
- Profit is not cash. Also check cash cover.
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