The interest coverage ratio measures how many times operating earnings cover interest expense, a key indicator of whether the business can comfortably service its debt without financial strain.
Calculated by dividing EBIT (earnings before interest and taxes) by interest expense, the ratio tells a lender how much cushion exists between what the business earns and what it costs to carry the debt. A ratio of 3.0 means the business earns three times its interest obligation, which is comfortable. A ratio approaching 1.5 or below signals that the business has limited margin for error if revenue contracts or interest rates rise.
Unlike DSCR, which includes principal repayments, the interest coverage ratio isolates only the interest burden. Lenders use both because they measure different dimensions of debt serviceability. For business owners, a declining interest coverage ratio, even before it triggers a covenant, is an early warning that the debt load may be becoming disproportionate to earnings.
See also: Debt Service Coverage Ratio (DSCR) · Debt Covenants · Free Cash FlowTracking the interest coverage ratio before a lender review keeps the conversation on the business’s terms. See how Wefinx approaches Virtual CFO services.