Interest coverage ratio
Financial Accounting glossary · Financial Statement Analysis & Ratios
Definition
EBIT / interest expense; measures the company's ability to service interest on outstanding debt.
Interest coverage ratio in plain English
This ratio checks whether a company earns enough to comfortably pay the interest on its loans. You take EBIT (earnings before interest and taxes — basically operating profit before the lender and the government take their cut) and divide it by the interest expense (the cost of borrowing). A result of, say, 5 means the company makes five times what it needs just to cover interest — plenty of breathing room, while a number near 1 means it's barely scraping by. It's like comparing your monthly paycheck to your minimum loan payment: the bigger the cushion, the safer you are.
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