What is Interest Coverage Ratio?
How many times over the business can cover its interest bill from operating profit.
Interest Coverage Ratio: definition
Where debt-to-equity measures how much a business owes, interest coverage measures whether it can afford the payments. It divides operating earnings by interest expense: a ratio of 5 means EBIT covers interest five times over. Below about 1.5 signals strain - little cushion if earnings dip - and below 1.0 means operating profit does not even cover interest.
Interest coverage ratio
Interest Coverage = EBIT ÷ Interest Expense
Some variants use EBITDA to approximate cash available for interest. Higher is safer; lenders often require a minimum coverage ratio as a covenant.
How Fintra handles it
Fintra computes interest coverage from operating earnings and interest expense on the live ledger, and can watch it against covenant minimums so a decline is caught early. Planning lets you test how new debt or a downturn in earnings would move coverage before you commit to either.
- Interest coverage computed live from EBIT and interest expense
- Covenant minimums monitored with early alerts
- Scenarios show coverage under new debt or lower earnings
Worked example
Frequently asked questions
What is a good interest coverage ratio?
A ratio above 3.0 is generally considered comfortable, giving room for earnings to fall before debt service is at risk. Between 1.5 and 3.0 is adequate but watchful; below 1.5 signals strain, and below 1.0 means earnings do not cover interest.
What is the difference between interest coverage and the debt-to-equity ratio?
Debt-to-equity measures how much debt a business carries relative to equity; interest coverage measures whether earnings can service that debt. A business can have high leverage yet strong coverage if earnings are robust, or low leverage yet weak coverage if earnings are thin.
Should interest coverage use EBIT or EBITDA?
EBIT is the traditional measure. EBITDA-based coverage adds back depreciation and amortization to approximate cash available for interest, which some lenders prefer for cash-focused analysis. Be clear which you use, since EBITDA produces a higher, more favorable ratio.
Why do lenders require a minimum coverage ratio?
Because it directly measures the ability to make interest payments. Loan covenants often set a floor (for example, coverage of at least 2.0) so lenders get early warning if the borrower ability to service debt weakens. Fintra monitors these covenants.
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