Glossary
Interest Coverage Ratio
Operating profit divided by interest expense — a direct read on debt-servicing capacity.
Interest Coverage Ratio = EBIT / Interest Expense. It measures how many times over a firm's operating profit could cover its annual interest bill — a direct read on debt-servicing capacity.
Above 3.0 is generally comfortable; below 1.5 is a yellow flag and below 1.0 means operating profit cannot fully cover interest, a near-default condition.
Bank loan covenants frequently specify a minimum interest coverage ratio; breaching it can trigger an immediate technical default even when the borrower has not missed a payment. Always inspect alongside debt-to-equity for the full leverage picture.