Lesson 02 — Interest Coverage Ratio
Week 08 · Lesson 2 of 3 · Week 08 — Key Ratios Part 2: Leverage & Efficiency
Back to beginner course
Interest Coverage Ratio = EBIT / Interest Expense It answers: "How many times over can the company pay its interest from operating profit?" | ICR | Signal |...
What is ICR?
Interest Coverage Ratio = EBIT / Interest Expense
It answers: "How many times over can the company pay its interest from operating profit?"
Benchmarks
| ICR | Signal |
|---|---|
| > 5× | Very comfortable |
| 3–5× | Adequate |
| 1.5–3× | Tight — keep watching |
| < 1.5× | Danger — may struggle to pay interest |
| < 1× | Company can't cover interest from operations! |
ICR < 1 is a red flag
The company is borrowing just to pay interest — a debt spiral. Avoid these.
Why ICR matters alongside D/E
A company may have D/E of 1.5 but ICR of 8× — it has significant debt but earns enough to service it easily.
Another company may have D/E of 0.8 but ICR of 2× — less debt but lower earnings make even that debt risky.
Always check both together.
Key takeaway
D/E tells you HOW MUCH debt. ICR tells you whether the company can HANDLE it.