Interest coverage divides operating income by interest expense. It's a direct test of debt serviceability — not whether a company has debt, but whether its day-to-day earnings comfortably cover the cost of carrying it.
The formula
Operating IncomeInterest Expense
= Interest Coverage
Why it matters
- —A thin coverage ratio is an early warning sign, often visible well before trouble shows up in headline debt-to-equity numbers.
- —Coverage that's deteriorating over time — even from a comfortable level — often precedes a credit-rating downgrade.
- —Best read alongside debt-to-equity for the full leverage picture: how much debt, and how easily it's serviced.
How to read it
| < 2× | Debt service is strained — limited cushion against an earnings downturn |
| 2×–5× | Manageable, but worth monitoring if rates rise |
| > 5× | Comfortable — minimal near-term debt risk |