GlossaryIntermediate
Interest Coverage Ratio
Operating earnings divided by interest expense, measuring how comfortably a company can service its debt obligations from current earnings.
The Interest Coverage Ratio divides a company's operating earnings (EBIT) by its interest expense, measuring how comfortably it can cover its debt-servicing costs from its current operating profit.
A low ratio suggests a company has relatively little buffer between its operating earnings and its interest obligations, a meaningful financial-risk signal distinct from the Debt-to-Equity Ratio, which measures leverage level rather than a company's current ability to actually service that debt. See Kaavon's dedicated Interest Coverage Ratio article for the full calculation.
Examples
- A declining Interest Coverage Ratio, even without rising debt, can signal a company's operating earnings are weakening relative to its existing debt obligations.
- Interest Coverage Ratio measures a company's current ability to service its debt from earnings, a different question from Debt-to-Equity's measure of overall leverage level.