Fundamental Glossary / Debt & Financial Stability
Interest Coverage Ratio
How many times operating profit covers the interest bill.
Formula
EBIT / interest expense. A cash version uses operating cash flow / cash interest.
What it means
Coverage below 1 means the current operating profit does not pay the interest. The firm is borrowing, selling assets, or using cash to stay current.
Coverage of 2 is thin for a cyclical business. Coverage of 6 or more is comfortable for most industrial companies. Lenders set the covenant, not a universal rule.
How to read it
Look at the trend. Coverage that slides from 8 to 3 while debt rises is the early part of a balance-sheet problem, even though 3 still clears a loose covenant.
What to watch
Capitalised interest is not in the expense. Add it back to the denominator if the company is building assets and parking the cost on the balance sheet. Also use a full year so a quiet quarter does not flatter the ratio.
This note explains the term. It is not a research recommendation, a target price, or a comment on any security. Ratios and regulatory thresholds change; use the latest filing or circular for a live figure.