Interest cover

In plain terms

Interest cover (also called the interest coverage ratio or times-interest-earned) measures how comfortably a business can pay the interest on its borrowings out of its profits. The formula is simple:

Interest cover = operating profit (EBIT) ÷ interest payable

If a company makes £300,000 of operating profit and pays £100,000 of interest, its interest cover is 3x — meaning earnings cover the interest bill three times over. The higher the number, the more headroom the business has and the more cushion against a downturn. A ratio dropping toward 1x means almost all profit is being swallowed by interest, leaving nothing for tax, investment or the unexpected.

Why it matters to your business

Interest cover is one of the first things a lender or investor looks at, because it answers a blunt question: can this business actually afford the debt it carries? A strong ratio signals resilience and usually earns better terms. A weak one signals fragility — a small drop in trading could tip the company into being unable to service its loans.

It also appears in loan covenants: many facilities require the borrower to maintain interest cover above an agreed minimum, tested quarterly. Breaching that covenant can trigger penalties or early repayment. As a director, tracking your own interest cover before you borrow — not just after — tells you how much new debt the business can genuinely sustain. It pairs naturally with debt-service coverage, which also factors in capital repayments.

An example

Two firms each want to borrow. Firm A makes £500,000 operating profit and would pay £80,000 interest — cover of 6.25x. Firm B makes £120,000 and would pay £95,000 — cover of just 1.3x. On profit, both are viable. But Firm B has almost no margin for error: a modest sales dip and it cannot meet its interest, let alone repay capital.

A lender will likely back Firm A on keen terms and either decline Firm B or price in the extra risk. The ratio, not the headline profit, drives the decision.