The interest coverage ratio measures how many times a company's operating profit covers the interest it owes on its debt. It is calculated as earnings before interest and taxes (EBIT) divided by interest expense, both taken from the income statement for the same period. The higher the result, the more room the company has to keep paying interest if profits dip. Some analysts use EBITDA instead of EBIT, so always check which version a source is showing.
Worked example
Company A has an operating profit (EBIT) of $12 million for the year and pays $3 million in interest on its loans and bonds. Interest coverage ratio = EBIT ÷ interest expense = $12 million ÷ $3 million = 4. Its operating profit covers the interest bill 4 times. If a bad year cut EBIT to $6 million while interest stayed at $3 million, the ratio would fall to 2.
Why it matters
Interest must be paid whether the year was good or bad, so this ratio shows how much of a profit cushion a company has before its debt becomes a strain. A low or falling figure is a question to look into: how much debt, at what rates, and when it must be refinanced. It misleads when profits swing a lot from year to year, when rising interest rates will lift the bill on debt that is about to be renewed, or when EBIT is a one-off high. Typical levels differ by industry, so compare a company with its own peers and its own past.
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Frequently asked questions
There is no single good level. It depends on the industry, how stable profits are and how the debt is structured. Stable businesses can carry more debt than businesses whose profits swing, so compare with peers and look at the trend over several years.
It means operating profit did not cover the interest for that period, so the company had to use cash reserves, sell assets or borrow more to pay it. One bad year is not the same as a lasting problem, so check how it looked in earlier years.
Both figures are on the income statement in the annual report: operating profit (EBIT) and interest expense, which is sometimes shown as finance costs. If EBIT is not shown as a line, it can be built from profit before tax plus interest expense.
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Built & maintained by Worthmap · Last updated November 1, 2026
Educational use only. This tool provides estimates for informational purposes and does not constitute financial, investment, tax, or legal advice. Results are based on inputs you provide and mathematical models, they do not guarantee future performance. Always consult a qualified financial adviser before making investment decisions.