Interest Coverage
How many times a company could pay its interest with the operating profit it earned — a look at its capacity to carry debt.
Interest Coverage = Operating Profit (EBIT) ÷ Interest Expense
When interest coverage is high (say, 5x or more), it is generally seen as having ample room to pay interest.
In plain terms
Imagine paying loan interest out of your paycheck. If your pay is 5 times the interest, there's room to spare; if it barely covers it 1 to 1, things are tight. Interest coverage is that same ratio for a company.
It shows how many times over the profit a company earned from operations covers the interest it owes. The larger the number, the more room it has to pay that interest.
What it tells you
It shows something the amount of debt alone (the debt ratio) doesn't: "can the company actually handle the interest on that debt?" Companies usually don't default because they have a lot of debt, but because they can't meet the interest or maturity coming due right now. So the capacity to withstand the debt is often more decisive than its size.
When rates rise or profits shrink, this is the first indicator of whether the company has room to bear its interest burden.
Formula
Interest Coverage = Operating Profit (EBIT) ÷ Interest Expense Example: operating profit 100, interest expense 20 → 5x (it earned 5 times its interest)
What high or low means
When interest coverage is high (say, 5x or more), it is generally seen as having ample room to pay interest.
Around 1x means operating profit barely covers the interest, so even a small wobble in profit can turn risky.
Below 1x means operating profit doesn't even cover the interest — a warning sign. That said, it may stem from a one-off cost. It only becomes clear across several quarters.
Operating profit is an accounting figure, so true ability to pay only shows up when you look at it alongside the cash that actually comes in (operating cash flow).
A company with almost no debt has small interest expense, so the ratio comes out very large. That makes it hard to compare companies using a single absolute figure; the change shows up in the trend of the same company.
Metrics to read alongside
See it in real stocks
Search US stocks on Stocklore to see Interest alongside the sector benchmark.
This explanation is for information and reference only and is not a recommendation to buy or sell any security. Investment decisions and their consequences are your own.