Definition
Interest coverage ratio shows how easily a company can pay interest on its debt. Higher ratios indicate safer debt levels. Below 1.5x is concerning; below 1.0x means the company can't cover interest from operating profit. Lenders closely monitor this covenant.
Formula
Interest Coverage = EBIT / Interest Expense
Example
With $50M EBIT and $10M annual interest expense, coverage is 5x. The company earns 5 times its interest obligation, a comfortable cushion.
FAQ
What is Interest Coverage Ratio?
EBIT divided by interest expense, measuring debt service ability.
How do you calculate Interest Coverage Ratio?
A common formula for Interest Coverage Ratio is: Interest Coverage = EBIT / Interest Expense
Why is Interest Coverage Ratio important?
Interest Coverage Ratio helps investors evaluate leverage and make more informed decisions.