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Definition
The interest coverage ratio divides operating profit (EBIT) by the annual interest charge. A ratio of 3 means profit covers interest three times over. Lenders use it to judge headroom — many look for at least 2 to 3 times — and it is a common loan covenant. It is closely related to, but distinct from, debt service cover, which also counts capital repayments.
In plain terms
It answers a simple question: if profit dipped, how far could it fall before you could not pay the interest? The higher the number, the more cushion.
Why it matters for your company
Check your interest cover before borrowing more — lenders certainly will. Work it out with the interest cover calculator. See debt service coverage ratio.
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