Interest coverage ratio
Interest coverage shows how many times over a company can pay its interest bill out of operating profit.
Formula
Interest coverage
Interest Coverage = Operating Profit ÷ Interest Expense
Benchmark: Minimum 4 to 5 times for comfort; higher is better
Reading the number
The numerator is operating profit, not net profit, because net profit is calculated after interest has already been paid. To judge whether the company can afford its interest at all, you need the profit before interest.
This ratio matters even when D/E is low. A company can have a D/E below 1 and still be unsafe if it earns little or no operating profit. A loss-making business cannot repay the bank no matter how little it borrowed.
Indian example
Related ratios
Glossary terms
From the research
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