Interest Coverage Ratio
Definition
The interest coverage ratio measures a company's ability to pay interest from operating earnings, most commonly EBITDA / Interest Expense (variants use EBIT or EBITDA minus capex in the numerator, and cash interest in the denominator). A 3.0x coverage means operating cash earnings cover interest three times over.
It complements the leverage ratio: leverage measures the stock of debt, coverage measures the flow burden of servicing it. Coverage is highly sensitive to rates — floating-rate capital structures saw coverage compress sharply as base rates rose — which is why credit investors watch it in rising-rate environments.
Rules of thumb (conventions vary): healthy leveraged credits often run EBITDA/interest around 2.0–3.0x or better; coverage approaching or below roughly 1.5x signals stress, and below 1.0x means the company cannot cover interest from operating earnings. The EBIT-based version is more conservative because it burdens earnings with D&A as a proxy for capex.
Why interviewers ask
Credit and restructuring interviews ask how you would evaluate whether a capital structure is sustainable — coverage is half the answer (with leverage). Expect questions like "what happens to coverage if rates rise 200 bps on a floating-rate structure?"
Related terms
Interviews don't test definitions — they test recall under pressure.
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