Interest Coverage Ratio

Interest coverage divides EBIT by interest expense to answer a blunt question: can the company pay the interest on its debt out of operating profit? A ratio of 4x means operating earnings cover the interest bill four times over; a ratio near 1x means nearly every operating dollar goes to lenders.

Rough zones: above 5x, interest is a footnote. Between 2x and 5x, manageable but worth watching through a downturn. Below 1.5x, the company is in the distress neighborhood — one bad year and it cannot service debt from operations, which forces asset sales, dilutive equity raises, or restructuring. Coverage below 1.0x for three straight years is the standard research definition of a zombie company — a business that exists to service its lenders.

The ratio can deteriorate from both directions at once: EBIT falls in a recession while floating-rate debt resets higher. A company that looked safe at 6x coverage in 2021-era rates can print 2x after refinancing the same principal at doubled coupons.