What is the interest coverage ratio of a company?

Q: What is the interest coverage ratio of a company?

The interest coverage ratio measures how many times a company can pay the interest on its debt with the profit it generates. It is calculated by dividing the EBIT by the interest expense. An interest coverage ratio above 5x is considered comfortable; below 1.5x or 2x it sets off solvency alarms, because the company barely earns enough to pay its creditors.

Updated June 27, 2026 · DeepTicker

The interest coverage ratio measures how many times a company can pay the interest on its debt with the profit it generates. It is calculated by dividing the EBIT by the interest expense. An interest coverage ratio above 5x is considered comfortable; below 1.5x or 2x it sets off solvency alarms, because the company barely earns enough to pay its creditors.

What Interest coverage ratio is and why it matters

The interest coverage ratio, also known as *times interest earned*, is one of the most important solvency indicators there is. It answers a critical and very specific question: does the company generate enough profit to pay the interest on its debt?. It is calculated by dividing the operating profit (EBIT) by the period's interest expense. The result is a number of times: an interest coverage ratio of 5x means the company earns five times what it needs to pay its interest.

To understand what the interest coverage ratio is it helps to think of a family with a mortgage. If your income covers the loan payment ten times over, you sleep easy: even if you have a bad month, you pay without trouble. If it barely covers it one and a half times, any setback (a pay cut, a repair) puts you in difficulty to pay the bank. The interest coverage ratio is exactly that idea applied to a company: it measures the cushion it has between what it earns and what it must pay its creditors.

This metric matters because debt does not kill companies by its size, but by its cost. A company can have a lot of debt and be perfectly healthy if it generates ample profit to pay its interest; and it can have little debt and be on the brink if its profit is so scarce or volatile that it barely covers that interest. The interest coverage ratio captures precisely that relationship between the burden of the debt and the real ability to pay it, which is what really determines the risk of bankruptcy in the short term.

The interest coverage ratio is interpreted intuitively: the higher, the safer. A high ratio (above 8x or 10x) indicates that the company could withstand a sharp drop in its profits without ceasing to pay its creditors: it has a comfortable cushion. A low ratio (below 2x) means that any deterioration of the business puts it at risk of default. And a ratio below 1x is a serious sign: the company does not even earn enough to pay its interest and is consuming reserves or taking on more debt just to stay afloat.

It pays to distinguish the interest coverage ratio from other debt metrics it complements. The net debt / EBITDA ratio measures how many years of operating profit (excluding depreciation) it would take to repay all the debt: it is a snapshot of the stock of debt. The interest coverage ratio, by contrast, measures the flow: whether this year's profit is enough to pay this year's cost of debt. The two together give a complete picture: one tells you how much debt there is, the other whether it is feasible to pay it.

There are several versions of the formula depending on which profit is used in the numerator. The classic uses EBIT (operating profit). A more conservative variant uses EBIT minus capex, to reflect that the company needs to reinvest to survive and that money is not available to pay interest. Another version uses EBITDA, which is more generous because it does not subtract depreciation, but also more misleading in very capital-intensive companies. Knowing which version is being used matters so as not to compare apples with oranges.

The interest coverage ratio is especially revealing in moments of rising interest rates. When money was almost free, many companies took on debt at very low interest and showed high coverage ratios. When rates rise, companies that refinance debt at much higher rates see their interest expense soar and their coverage collapse, even if their business hasn't changed. That is why this metric is a key thermometer of risk in high-rate environments: it reveals which companies have a cushion to hold on and which are on the tightrope.

How Interest coverage ratio is calculated

Interest coverage ratio = EBIT / Interest expense

· EBIT: the operating profit, that is, what the company earns from its activity before paying interest and taxes; it measures the business's real ability to generate profit.
· Interest expense: the total cost the company pays for its debt during the period; it appears in the income statement as financial expenses.
· Result (x times): how many times the operating profit covers the interest; the higher, the greater the solvency cushion.
· Conservative variant: (EBIT − capex) / Interest expense, which subtracts the investment needed to maintain the business before paying interest.
· EBITDA variant: EBITDA / Interest expense, more generous because it does not subtract depreciation, useful with caution in companies that are not capital-intensive.

Example of Interest coverage ratio

An industrial company obtains an EBIT of €80 million and pays €10 million in interest on its debt. Its interest coverage ratio is 80 / 10 = 8x: it earns eight times what it needs to pay its creditors. It is a very comfortable cushion: even if its profits fell by half in a recession, it would still cover the interest four times. An investor can be calm about this company's short-term solvency, at least on the debt side.

Compare it with a competitor that generates an EBIT of 24 million but pays 18 million in interest because it took on a lot of debt at high rates. Its interest coverage ratio is 24 / 18 = 1.3x: it barely earns 30 % more than it has to pay in interest. Here any bad year (a drop in sales, a rise in the cost of debt on refinancing) would leave it with no margin to pay, forcing it to sell assets, raise capital or, in the worst case, default. Same sector, same type of business, but a radically different risk profile that the interest coverage ratio reveals at a glance.

How to interpret Interest coverage ratio

→An interest coverage ratio above 5x is comfortable; below 2x it is the risk zone; below 1x the company does not even earn enough to pay its interest.
→It measures the flow (whether the year's profit covers the year's interest), complementing the net debt / EBITDA ratio that measures the stock of debt.
→The acceptable threshold depends on the business: a cyclical company needs much higher coverage than one with stable, predictable revenue.
→The EBITDA version gives higher, more optimistic coverage; in capital-intensive companies it is more prudent to use EBIT.
→It is a key thermometer in high-rate environments: it reveals which companies will hold on when refinancing debt at higher rates and which are on the tightrope.
→It pays to look at it over several years, including the bad ones, not just at the peak of the cycle when everything looks good.

Common mistakes with Interest coverage ratio

✕Using EBITDA without thinking: it inflates coverage by ignoring depreciation, hiding the risk in very capital-intensive companies.
✕Relying on coverage from a single good year: in cyclical businesses it can collapse in the recession, so you have to look at several years.
✕Forgetting refinancing risk: comfortable coverage today can collapse if the debt matures soon and is refinanced at higher rates.
✕Reading coverage against a magic number without comparing it with the sector and the stability of the business.
✕Looking at coverage isolated from the net debt / EBITDA ratio: one measures the annual cost, the other the volume of debt, and both are needed.

What interest coverage ratio counts as good or bad

Although there is no universal threshold, there are widely accepted guideline references. An interest coverage ratio above 5x is considered comfortable and healthy in most sectors: the company has a good cushion to absorb bad years. Between 2.5x and 5x the situation is acceptable but worth watching, especially if the business is cyclical. Below 2x we enter the risk zone, and below 1.5x the company is clearly squeezed. A coverage below 1x is a serious warning sign: it does not generate even enough to pay its interest.

The right threshold depends heavily on the type of business. A company with very stable, predictable revenue (a regulated utility, a toll-road operator, a consumer-staples company) can operate with lower coverage without too much risk, because its profits don't fall sharply. By contrast, a cyclical company (automotive, commodities, construction) needs much higher coverage in the good years, because its profits can collapse in a recession and the cushion must withstand that fall.

That is why the interest coverage ratio should not be read against a magic number, but compared with that of the sector and with the stability of the business. In DeepTicker, the solvency dimension of the DeepScore incorporates the interest coverage ratio along with other debt metrics, and compares it with the benchmarks specific to each sector, because the same ratio does not mean the same thing in a regulated utility as in a cyclical industrial company.

Interest coverage ratio versus net debt / EBITDA

The interest coverage ratio and the net debt / EBITDA ratio are two sides of the same coin: debt risk. The difference is that they measure different things. The interest coverage ratio measures the flow: whether this year's profit is enough to pay this year's cost of debt. The net debt / EBITDA ratio measures the stock: how many years of operating profit it would take to repay all the debt. One looks at the payment; the other, at the outstanding principal.

They can give apparently contradictory signals, and understanding why is very useful. A company with a lot of debt but at very low rates can have a high net debt / EBITDA ratio (it looks very indebted) and at the same time a comfortable interest coverage ratio (it pays its interest without trouble because it is cheap). Conversely, a company with little debt but contracted at very high rates could have a low debt ratio and tight coverage. That is why it pays to look at both at once.

The practical conclusion is that neither is enough on its own. A truly solvent company needs a contained net debt / EBITDA ratio and comfortable interest coverage. If it only meets one of the two, you have to understand why. DeepTicker integrates both into its solvency analysis so you have the complete picture of financial health, not just half a snapshot that could be misleading.

Mistakes and traps when using the interest coverage ratio

The first mistake is using EBITDA instead of EBIT without thinking. Coverage with EBITDA is always higher because it does not subtract depreciation, which makes it look healthier. But in very capital-intensive companies (heavy industry, telecoms, transport), that depreciation reflects real and inevitable reinvestment: ignoring it artificially inflates coverage and hides the risk. For those companies it is more prudent to use EBIT, or even EBIT minus capex.

The second mistake is relying on an interest coverage ratio from a single year, especially if that year was exceptionally good. In cyclical businesses, coverage at the peak of the cycle can be great and collapse in the recession. It pays to look at coverage over several years, including the bad ones, to see how it behaves when the business suffers. Coverage that holds up in the weak years is much more reassuring than a very high one in the best year.

The third mistake is forgetting refinancing risk. A company may have comfortable coverage today thanks to debt contracted years ago at low rates, but if all that debt matures soon and it will have to refinance it at much higher rates, its future coverage could collapse. That is why it also pays to look at the debt maturity schedule and the average rate it pays, not just the snapshot of current coverage.

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Frequently asked questions about Interest coverage ratio

What is the interest coverage ratio in simple words?

It is how many times a company can pay the interest on its debt with the profit it generates. It is calculated by dividing the EBIT by the interest expense. A coverage of 5x means it earns five times what it needs to pay its creditors.

What interest coverage ratio counts as good?

Above 5x is considered comfortable and healthy in most sectors. Between 2.5x and 5x is acceptable but worth watching. Below 2x is the risk zone, and below 1x the company does not even earn enough to pay its interest.

What does an interest coverage ratio below 1 mean?

It is a serious warning sign: the company does not generate even enough to pay the interest on its debt. It is consuming reserves or taking on more debt just to stay afloat, which can end in default.

How is the interest coverage ratio calculated?

By dividing the EBIT (operating profit) by the period's interest expense. For example, an EBIT of 80 million and interest of 10 million give a coverage of 8x. There are variants that use EBITDA or EBIT minus capex.

How does it differ from net debt / EBITDA?

The interest coverage ratio measures the flow: whether the year's profit is enough to pay the year's interest. Net debt / EBITDA measures the stock: how many years it would take to repay all the debt. It pays to look at both at once.

Why does the interest coverage ratio matter when rates rise?

Because companies that refinance debt at higher rates see their interest expense soar and their coverage collapse, even if their business hasn't changed. It is a key thermometer of risk in high-rate environments.

Is it better to use EBIT or EBITDA in the interest coverage ratio?

It depends on the business. The EBITDA version is more generous because it does not subtract depreciation, but it is misleading in capital-intensive companies, where reinvestment is inevitable. For those companies it is more prudent to use EBIT or EBIT minus capex.

Where do I see the interest coverage ratio of a stock?

In the company's accounts, dividing its EBIT by its financial expenses. In DeepTicker, the solvency dimension of the DeepScore incorporates the interest coverage ratio compared with the benchmarks of each sector, so you can see at a glance whether it is solid or fragile.

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