Reading the accounts
Interest coverage
How many times over a company’s operating profit covers its interest bill.
How it works
Coverage of 10× means interest consumes a tenth of operating profit. Below about 2× leaves very little room for a bad year.
It is often a more immediate measure of distress risk than total debt, because interest must be paid continuously while principal is due only at maturity.
Formula
Interest coverage = operating income ÷ interest expenseRelated terms
- Net debt / EBITDAHow many years of operating earnings it would take to repay net borrowings.
- Operating incomeProfit from the core business, before interest and tax.
- CovenantA condition in a loan agreement that the borrower must keep to.
- Credit ratingAn agency’s assessment of how likely a borrower is to repay, on a lettered scale.
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