Interest coverage
Operating profit divided by interest: how many times over the company could pay its interest bill.
Worked example · a round-number company
Operating income$750M÷Interest expense$100M=Coverage7.5xHow to read it
↑Higher is better. It is the cushion before interest would eat all the operating profit.
Example Co. 7.5x
Under 3x3x to 8xOver 8x
Under 3x leaves little room if profit falls.
Keep in mind
- Floating-rate debt can make next year's interest bill very different from this year's.