Interest Coverage Ratio
Operating profit divided by interest expense, measuring how many times over the company's earnings can pay its interest bill.
Formula
Interest Coverage = Operating Profit (EBIT) / Interest Expense
Unit
ratio (x, times)
In depth
Coverage tests the ability to service debt rather than the amount of it, which makes it a better single indicator of financial distress than debt-to-equity. Ratios below about 1.5 leave almost no room for a bad year, and below 1 the company cannot pay interest from operations at all. The ratio flatters companies that capitalise interest into assets under construction, since that interest never reaches the profit and loss statement. Lenders frequently write coverage covenants into loan agreements, so a breach can accelerate repayment of the entire facility — which is why the trend matters more than the level.
Worked example
Operating profit ₹160 crore against interest of ₹40 crore gives coverage of 4 times. A 40% fall in operating profit to ₹96 crore takes coverage to 2.4; a 75% fall leaves exactly enough to pay interest and nothing for shareholders.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “Interest Coverage Ratio” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.