What Does Interest Coverage Ratio Mean?
A ratio used to determine how easily a company can pay interest on outstanding debt. The interest coverage ratio is calculated by dividing a company's earnings before interest and taxes (EBIT) for one period by the company's interest expenses for the same period. It is calculated as follows:
Investopedia explains Interest Coverage Ratio
The lower the ratio is, the more a company is burdened by its debt expense. When a company's interest coverage ratio is 1.5 or less, its ability to meet its interest expenses may be questionable. An interest coverage ratio below 1 indicates that a company is not generating sufficient revenues to satisfy interest expenses and should raise a red flag for investors.
Related Terms:
• Cash and Cash Equivalents—CCE
• Debt
• Fixed-Income Security
• Interest Rate
• Junk Bond
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