Interest Coverage Ratio
A measure of a company's ability to service its debt, calculated as EBIT divided by interest expense.
Interest Coverage Ratio = EBIT / Interest Expense. A ratio of 3x means the company earns three times as much in operating income as it owes in annual interest — generally considered adequate for most industries. Ratios below 1.5x indicate the company struggles to cover interest from operations and may be at risk of default. Ratios below 1.0x mean interest expense exceeds operating income.
Interest coverage is often a financial maintenance covenant in loan agreements, with lenders requiring the ratio to remain above a minimum threshold (commonly 2.5-3.5x). Violations trigger covenant breach and potential acceleration of the loan. Document intelligence can extract interest coverage disclosures and covenant requirements from financial filings and credit agreements, flagging situations where the ratio is approaching the covenant floor before the lender discovers a breach.
Related Terms
More financial Terms
10-K Filing
An annual report filed with the SEC that provides a comprehensive overview of a public company's financial performance.
Balance Sheet
A financial statement that reports a company's assets, liabilities, and shareholders' equity at a specific point in time.
EBITDA
Earnings Before Interest, Taxes, Depreciation, and Amortization — a measure of a company's operating profitability.
Amortization
The gradual reduction of an intangible asset's value or a loan balance through scheduled periodic payments.
Revenue Recognition
The accounting principle that determines when and how revenue is recorded in financial statements.
Cash Flow Statement
A financial statement that tracks the movement of cash in and out of a business across operating, investing, and financing activities.
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