Financial Glossary
Interest Coverage Ratio (Formula)
The interest coverage ratio measures how many times a company can cover its interest obligations from operating earnings, calculated as earnings before interest and taxes (EBIT) divided by interest expense for the same period. A higher ratio signals more comfortable debt servicing, while a ratio near or below one indicates earnings barely cover, or fail to cover, interest due. Lenders and analysts use it as a quick read on solvency risk.
Problem & Application
Real-estate investors, campground owners, and any operator carrying loans use the interest coverage ratio to gauge whether the business can withstand a slow season or a rate increase without missing payments. To compute it, pull EBIT from the income statement and divide by total interest expense; for example, $200,000 EBIT against $50,000 of interest yields a ratio of four. Lenders often set a minimum coverage covenant, so tracking this metric before applying for financing helps you anticipate how a bank will view the deal.
In Short
The interest coverage ratio is a fast solvency check: EBIT divided by interest expense. Watch it trend over time and against any lender covenants tied to your debt.