What Is the Interest Coverage Ratio?
The interest coverage ratio measures how comfortably a company can pay the interest on its outstanding debt out of its operating earnings. It's a key test of financial resilience, especially for leveraged companies.
The formula
Interest coverage ratio = operating profit (EBIT) ÷ interest expense. A ratio of 5 means the company earns five times its interest bill — a comfortable cushion. A ratio near or below 1 means operating earnings barely cover (or fail to cover) the interest, a serious warning sign.
Why it matters
A company can look profitable yet be fragile if most of its earnings go to servicing debt. The interest coverage ratio catches that risk directly — a low ratio means little margin for error if earnings dip or rates rise. It pairs naturally with the debt-to-equity ratio: D/E shows how much debt there is, interest coverage shows whether the company can afford it.
Computing it
Both operating profit and interest expense are reported in the income statement, so you can compute coverage from the financials data.