Interest Coverage Ratio

How many times a company's operating earnings can cover its interest payments.

Part of the Financial Health & Risk course · Lesson 4 of 13

Formula

EBIT / Interest Expense

What it is

The interest coverage ratio measures how comfortably a company can pay the interest on its debt out of its operating profit. It is usually calculated as operating income (EBIT, earnings before interest and taxes) divided by interest expense. A ratio of 5 means earnings cover interest five times over.

Why it matters

This is a direct test of solvency: a low ratio means a company is dangerously close to not being able to service its debt, especially if earnings dip or rates rise. A ratio near or below 1 is a serious red flag, since earnings barely or fail to cover interest. It complements balance-sheet leverage measures by focusing on the income statement's ability to handle debt costs.

How it's calculated

Divide EBIT (operating income before interest and taxes) by total interest expense for the period; some versions use EBITDA in the numerator instead.

How Quintarthai uses it

Interest coverage is shown among the leverage and solvency ratios on a company's deep-analysis page and is one of the inputs behind Quinn's delisting and distress risk flags.

Cross-border note. Interest expense can be presented differently under IFRS versus US GAAP, particularly around capitalized interest and lease-related finance costs, so check the income-statement detail when comparing Canadian and US filers.

FAQ

What interest coverage ratio is considered safe?

Many analysts view a ratio above about 3 times as healthy and below roughly 1.5 times as risky. A figure at or below 1 means operating earnings do not fully cover interest, which is a strong distress signal.

Does it use EBIT or EBITDA?

The classic version uses EBIT (operating income before interest and taxes). Some lenders use an EBITDA-based version, which produces a higher, more lenient ratio because it adds back depreciation and amortization.

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