Interest coverage
Definition · Level 9 · Valuation
Keep reading with Tradecraft
Without an account, you can read three definitions every 30 days. Tradecraft explains all 738 terms and strategies, with the lessons that teach them, flashcards that come back before you forget, quizzes and a payoff lab.
EBIT ÷ interest expense: how many times operating profit covers the interest bill. Below roughly 2x is a common warning line.
Example
EBIT $600M ÷ interest $150M = 4.0x.
Rules and market figures change: check the current ones before relying on this.
Where Tradecraft teaches it
Level 9 · Valuation, in the lesson “Balance-sheet health: leverage and liquidity”: Debt/equity, net debt, net debt/EBITDA, interest coverage, current and quick ratios.
Related terms
- Current ratioCurrent assets ÷ current liabilities: whether resources turning into cash within a year cover the bills due within a year.
- Current vs quick ratioCurrent assets ÷ current liabilities, versus a stricter test that keeps only cash, short-term investments and receivables in the numerator…
- Debt/equityTotal debt ÷ shareholders’ book equity — a leverage gauge.
- Net debtTotal debt minus cash and equivalents. A negative figure means the company holds more cash than it owes (a “net cash” position).
- Net debt/EBITDALeverage in “turns”: borrowings less cash, divided by operating earnings before D&A.
- 10-K / 10-Q / 8-KSEC filings: the audited annual report, the unaudited quarterly report, and the current report for material events such as earnings releases, deals…