What is Interest coverage?
Foiz qoplamasi
In short
Operating income ÷ interest expense. Shows how many times profit covers interest; below about 2 is a danger zone.
Interest coverage shows how many times a company's operating profit covers the interest it pays on its debt.
Interest coverage = Operating income (EBIT) ÷ Interest expense
Both figures are on the income statement.
How to read it
- 5–10 or more — the interest burden is light, with a big cushion if profit falls.
- 2–5 — moderate; sensitive to a drop in profit.
- Below 2 — danger zone: even a small dip in profit makes interest hard to pay.
- Below 1 — operating profit does not even cover interest; the company is paying from cash reserves, new debt or new shares.
Why you need it after D/E
Debt-to-equity shows the size of the debt; interest coverage shows the ability to service it. Of two companies with the same debt, the one with steadier profit is safer.
The effect of rates
When interest rates rise, a company that refinances its debt pays more interest and its coverage falls — even if the business has not changed. So check debt maturities too.
From a halal perspective: interest payments relate to riba; the level of interest-bearing debt is checked separately in halal screening — details in the methodology.
If Company Z's operating income falls 33% ($12m → $8m), all of it goes to interest. Nur Tech could lose 98% of its operating income and still pay its interest.
Example
Hypothetical companies ($ millions):
A: operating income 120, interest expense 20 → coverage 120 ÷ 20 = 6x.
- If profit falls 50% to 60: 60 ÷ 20 = 3x — still manageable.
- If the debt is refinanced at a higher rate and interest rises to 40: 120 ÷ 40 = 3x.
B: operating income 30, interest 20 → 1.5x.
- If profit falls 40% to 18: 18 ÷ 20 = 0.9x — profit no longer covers the interest.
With the same interest burden, B's safety margin is much smaller.
Mistakes and tips
Look at coverage in bad years, not one good year — in cyclical companies the difference is huge.
If EBIT includes one-off gains, strip them out and recalculate.
Keep positions smaller in companies whose coverage is falling while debt maturities approach.
Frequently asked questions
- What is a good interest coverage ratio?
- Many analysts consider above 3 adequate and above 5 strong. Coverage below 2 is usually a signal to be careful.
- What is the interest coverage of a company with no debt?
- With interest expense near zero the ratio becomes very large or undefined. That simply means there is no debt burden, which is good from a risk standpoint.
Learn it in the Academy
This term is covered with hands-on examples and a quiz in these lessons of the interactive course.
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