Interest Coverage Ratio
$
Earnings before interest & tax
$
The interest coverage ratio measures how comfortably a company can pay interest on its debt from operating earnings. Interest coverage = EBIT / Interest expense. A ratio below 1.5 is a warning sign.
- 1Get EBIT (Earnings Before Interest and Taxes) from the income statement
- 2Get total interest expense for the period
- 3Interest coverage = EBIT / Interest expense
EBIT £200k · Interest £40k=Coverage ratio = 5.0xEarns 5 times what it needs to service debt
| Ratio | Assessment |
|---|---|
| > 5x | Excellent — very comfortable |
| 3–5x | Good — manageable debt level |
| 1.5–3x | Adequate — tight but viable |
| < 1.5x | Danger — may struggle to service debt |
| < 1.0x | Crisis — cannot cover interest from operations |
⭐
Fun Fact
Credit rating agencies (Moody's, S&P) use interest coverage as a primary input when rating corporate bonds. Falling below 2x often triggers a credit rating downgrade.
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