Measures a company's ability to cover its interest expenses with its earnings.

What it Measures ?

Can we easily pay interest on our debts?

Relevant StakeHolders 

CFO, Finance Team

In-depth Use Case / Real-world Example

The Interest Coverage Ratio is calculated by dividing a company's EBIT (Earnings Before Interest and Taxes) by its interest expense. For example, if a company has ₹500,000 in EBIT and ₹100,000 in interest expenses, the ratio is 5.0, meaning the company earns five times the amount required to pay interest on its debt. A higher ratio indicates greater ability to meet interest payments and suggests lower financial risk. On the other hand, a low ratio may signal that a company is over-leveraged and may face challenges in meeting its debt obligations. This ratio is vital for assessing a company’s financial stability, especially when looking at potential investment risks.