Interest coverage ratio

The interest coverage ratio divides operating profit (EBIT) by interest expense to measure how comfortably a company's trading earnings cover its debt servicing costs; a ratio below 2 is commonly treated as a warning signal.

ByHoang TruongUpdated July 3, 2026

FrameworkRatio analysis

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A company with EBIT of €800,000 and annual interest expense of €200,000 has an interest coverage ratio of 4×, meaning operating profit could pay the interest bill four times over. Ratios above 3 are comfortable; a ratio near 1 signals a trading downturn could jeopardise debt service.

Where it fits

SubjectFinancial AccountingCoreTopicFinancial Statement Analysis & RatiosCore

The formula

LaTeX

\text{ICR} = \frac{\text{EBIT}}{\text{Interest Expense}}

Variables

$E B I T$: Earnings before interest and tax (operating profit) (€)
$I n t er es tE x p e n se$: Finance cost recognised in the income statement for the period (€)

A ratio above 3 is generally considered comfortable; a ratio approaching 1 signals that a trading downturn could jeopardise debt service. Loan covenants frequently specify a minimum level.

Check yourself

PracticeCORE

Dorado plc reports: revenue €4,000,000; cost of sales €2,400,000; operating expenses €800,000; interest expense €240,000; tax charge €112,000. What is Dorado's interest coverage ratio?

Select an answer to check your understanding.