Interest coverage ratio.

In plain English

The interest coverage ratio divides operating income, often called EBIT, by interest expense for the same period. A ratio of 5 means operating profit is five times the interest bill, so profit could fall by roughly 80 percent before interest stops being covered. Lenders write minimum coverage levels into loan agreements, and breaching one can trigger a default even when every payment has been made on time. The ratio covers interest only. Principal repayments sit outside it, which is why it is usually read alongside a broader coverage measure.

01Why it matters

It is the cleanest early-warning number on a borrower, because coverage tends to erode quarter by quarter well before a company actually misses a payment.

02The math, step by step

Operating income is $450 million and interest expense is $90 million. $450 million divided by $90 million is coverage of 5.0. If operating income fell to $180 million, coverage would drop to 2.0 and the cushion would be much thinner.

Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.

03What this is NOT

04Receipts

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