What is Interest Coverage?
Interest Coverage shows how many times a company can pay interest expenses with its earnings. Below 1.5 is dangerous, above 3 is safe.
Think of it like this
You earn $5,000/month with $500 mortgage interest. Your coverage is 10x - very safe! If earnings drop to $1,000, coverage is 2x - getting risky!
Formula
Interest Coverage = EBIT / Interest Expense- EBIT: Earnings Before Interest and Taxes
- Interest Expense: Annual interest on debt
Why it matters
- Shows debt servicing ability
- Critical for survival in downturns
- Banks watch this closely
- Red flag if trending down
What's a good value?
< 1.5
Distressed
Cannot cover interest - danger!
1.5-2.5
Weak
Just barely covering interest
2.5-5
Adequate
Comfortable coverage
> 5
Strong
Easily covers debt obligations
> 5
Strong
Very safe from default
Real-world example
Apple coverage: 20x - massive cash generation. Utility company: 3x - stable but leveraged. Struggling retailer: 0.8x - may default on debt.
Things to watch out for
- EBIT can be volatile
- Doesn't include principal payments
- Off-balance sheet obligations excluded
- One bad year can change dramatically
Screen US stocks by Interest Coverage in the app, and see which companies pass right now.