Glossary
Interest coverage ratio
Operating profit (EBIT) divided by interest expense; how many times over a company can pay the interest on its debt.
On this page
The interest coverage ratio, also called times interest earned, measures how many times a company's operating profit covers the interest it owes on its debt. It is one of the first numbers lenders and rating agencies look at, because a business that barely earns its interest bill has little room for a bad year before it has to borrow more, cut spending or default.
How it is calculated
EBIT is earnings before interest and taxes, usually taken as operating income from the income statement. Some analysts substitute EBITDA in the numerator, which gives a higher, more forgiving figure because it adds back depreciation and amortization.
Reading the number
There is no universal threshold, but a ratio below about 1.5x usually draws concern, and a figure under 1.0x means operating profit does not cover interest at all. Stable businesses such as utilities can carry lower coverage than cyclical ones whose profits swing. Watch the trend as well as the level: coverage falls when rates rise on floating-rate or refinanced debt even if profits hold steady, which is why the ratio moved for many borrowers as rates climbed in 2022–2023. A one-off gain in EBIT can flatter the ratio for a single year, so a multi-year view is safer.