interest coverage ratio

The interest coverage ratio measures a company's ability to pay its interest expenses with its earnings. It is calculated by dividing the company's earnings before interest and taxes (EBIT) by its interest costs. A higher ratio indicates the company generates enough profit to comfortably cover interest payments, signaling financial stability. Conversely, a low ratio suggests it may struggle to meet interest obligations, which could raise concern for lenders and investors. This ratio helps assess the company's financial health and risk level related to debt management.