Interest coverage ratio (also times-interest-earned (TIE) ratio) indicates a company's ability to pay its debt, i.e., whether the operating profit generated is sufficient to cover all interest expenses.
$$Interest\;coverage\;ratio \mmlToken{mo}[linebreak="auto"]{=} \frac{EBIT}{Interest\;expense\;for\;the\;reporting\;period}$$
Depending on circumstances, calculations may use either EBIT or EBITDA. Interest expenses are typically sourced from the income statement for the reporting period. The interest coverage ratio should ideally be at least 2.5.
FAQ
What does interest coverage ratio measure?
It measures whether operating profit is enough to cover interest expense.
What is a good interest coverage ratio?
Higher is better, and many lenders prefer a value above 2.5.
Do analysts use EBIT or EBITDA?
Both are used depending on the company and reporting context, but EBIT is the standard starting point.
