What it is
The interest coverage ratio, also known as the times interest earned ratio, is a solvency and debt ratio that measures how easily a company can pay interest on its outstanding debt. It is calculated by dividing earnings before interest and taxes (EBIT) by the interest expense. A higher ratio indicates a company has more earnings available to cover its interest obligations, suggesting lower default risk.
This ratio is closely watched by creditors, investors, and rating agencies to evaluate a company's financial health and its capacity to manage debt. A low interest coverage ratio, especially below 1.5, signals potential financial distress or a struggle to meet debt payments, which could lead to credit downgrades or bankruptcy. It is often discussed in earnings reports and analyst calls.
Why it matters
It shows if a company can comfortably pay its debt interest, which is vital for assessing financial stability. A strong ratio signals lower risk.
Reviewed under editorial standardsUpdated September 26, 2026Not investment advice