Definition Interest coverage ratio

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Interest coverage ratio

The interest coverage ratio is a measurement of the debt in a company and refers to the number of times a company can make interest payment with earnings before the interest and tax payments.

To calculate the interest coverage ratio take the operating income (EBIT) and divide by the interest expenses.

The major disadvantage in using the interest coverage ratio is that it ignores taxes and provides a misleading representation of the company's health. It is well advised that when calculating the interest coverage ratio to use the following formula instead.

To calculate the interest coverage ratio (including taxes) take the company's earnings before interest and divide by the interest expenses.

Interest coverage ratio values below 1 show companies/individuals that are currently unable to meet their interest payments and as a conservative measure companies/individuals should not own a stock/bond with an interest coverage ratio less than 1.5.

See interest coverage, See operating income (EBIT)

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