Interest Coverage
Whether profits comfortably cover interest, or the lenders are getting nervous.
Interest coverage = Operating profit (EBIT) ÷ Interest expense
How many times over the company’s operating profit can pay its interest bill.
D/E tells you how much debt exists; interest coverage tells you whether the company can comfortably SERVICE it. A coverage of 8 means profits cover interest eight times over — very safe. A coverage of 1.5 means there’s little cushion before the company struggles to pay lenders.
Interest coverage is often a better danger signal than D/E itself, because it captures whether the debt is actually affordable. A company can carry lots of debt safely if it gushes profit — and modest debt can sink a company whose earnings are thin or collapsing. Watch coverage falling toward ~2 or below.
Key takeawayInterest coverage = EBIT ÷ interest; it shows whether profits comfortably cover the debt’s interest. High is safe; falling toward ~1.5–2 is a red flag.
FAQs
Which matters more — debt-to-equity or interest coverage?
They’re complementary, but coverage often gives the earlier warning: it reflects whether debt is affordable right now. A highly-indebted but hugely profitable firm can be safer than a lightly-indebted one whose earnings are evaporating.