Interest coverage
Also called: interest coverage ratio, interest cover, debt service coverage
Operating profit (EBIT) divided by interest expense, showing how many times over profits could pay the interest bill.
Because interest is fixed, coverage falls faster than profit when profit drops, so judge it in a bad year as well as a good one. Variants use EBITDA or operating cash flow, and debt service coverage adds scheduled loan repayments to interest.
Example
EBIT of ₹300 crore against interest of ₹60 crore is coverage of 5 times; if EBIT falls 60%, coverage falls to 2 times.
Learn more in these lessons
- Interest coverageHow can you tell whether a company can afford its interest payments?
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