interest coverage ratio

Definition

Interest Coverage Ratio
The Interest Coverage Ratio is a measure of a company’s ability to meet its interest obligations from its operating earnings. It is determined by dividing earnings before interest and taxes (EBIT) by the interest expense, thus indicating how many times the company can cover its interest payments with its current earnings. A higher ratio suggests that the company is well positioned to manage its debt service costs, offering a cushion against economic downturns or unexpected financial challenges. Conversely, a lower ratio could signal difficulty in meeting interest obligations, potentially increasing the risk for creditors and investors. This ratio is a vital indicator of financial health and stability, particularly for companies with significant debt levels.

See also