Metric Explainer: Interest Coverage Ratio
How many times over the company can pay its interest expenses from operating profit. Higher is safer. "Interest Coverage batata hai ki company apna interest...
Simple definition
How many times over the company can pay its interest expenses from operating profit. Higher is safer.
🗣️
"Interest Coverage batata hai ki company apna interest kitni baar de sakti hai apne operating profit se. 5× matlab 5 guna zyada profit hai interest se."
Why it matters
- Debt safety indicator — can the company comfortably service its debt?
- Credit rating driver — rating agencies use ICR as a primary input
- Complement to D/E — D/E shows how much debt exists; ICR shows if the company can handle it
- Early warning signal — declining ICR precedes financial distress
Formula
Interest Coverage Ratio = EBIT / Interest Expense (Finance Costs)
Use EBIT, not EBITDA
EBIT is the standard because interest is paid from operating profit after depreciation. Some analysts use EBITDA for asset-light companies.
Good range
| ICR | Safety assessment |
|---|---|
| > 10× | Very comfortable — minimal debt risk |
| 5–10× | Comfortable |
| 3–5× | Adequate but monitor |
| 1.5–3× | Tight — vulnerable to earnings dip |
| 1.0–1.5× | Danger — barely covering interest |
| < 1.0× | Cannot cover interest — default risk |
Sector context
| Sector | Typical ICR | Why |
|---|---|---|
| IT Services | 50–100× | Almost zero debt |
| FMCG | 15–30× | Low debt, high cash generation |
| Manufacturing | 4–10× | Moderate leverage |
| Infra / Construction | 2–5× | High project debt |
| Power Utilities | 2–4× | Heavy capex debt, regulated returns |
| Real Estate | 1.5–4× | Heavy debt, long project cycles |
Common mistakes
Mistakes to avoid
- Ignoring lease interest — IndAS 116 reclassifies lease payments into D&A + interest. Include both
- Using PAT instead of EBIT — ICR should be pre-tax and pre-interest
- Single-year view — Check the 5-year trend. A company with ICR 5 declining from ICR 10 is worrying
- Capitalised interest — Interest during construction phase may be capitalised (added to assets, not on P&L). This flatters ICR
Real example
| Company | EBIT (₹ Cr) | Interest (₹ Cr) | ICR |
|---|---|---|---|
| TCS | 48,000 | 500 | 96× |
| Adani Ports | 12,000 | 4,000 | 3.0× |
| JSW Steel | 18,000 | 6,000 | 3.0× |
TCS has almost no debt — ICR is meaninglessly high. Adani Ports and JSW Steel have moderate ICR but enough to service debt. For JSW, one bad year (steel downturn) could drop EBIT 50% and push ICR below 1.5×.
Red flags
- ICR below 2× for a non-regulated business — high default risk
- ICR declining over 3+ years — debt servicing becoming harder
- ICR < 1 — the company cannot cover interest from operations (using reserves or borrowing more)
- High ICR but very high debt — check if the company is relying on floating rate debt with rate risk
Related metrics
- Debt/Equity — How much debt exists (quantity)
- EBIT — Numerator of ICR
- Finance Costs — Denominator of ICR
- Net Debt/EBITDA — Another leverage adequacy metric