What is the interest coverage ratio?
Also called times interest earned (TIE), the ratio shows how many times over a company's operating profit could cover its interest bill. The higher the ratio, the more cushion the business has.
Formula
Interest coverage = EBIT ÷ Interest expense
Some lenders use [EBITDA](/glossary/ebitda) instead of EBIT, giving a higher figure.
Example
A business has operating profit (EBIT) of $300,000 and annual interest of $60,000. Interest coverage = 5x.
How to interpret it
- Below 1.5x: high risk; the business may struggle to meet interest payments.
- 2x to 3x: acceptable for many small businesses.
- Above 5x: comfortable, with room to borrow more.
Lenders often set a minimum coverage ratio as a loan covenant. Breaching it can trigger penalties or early repayment.
How to improve it
- Grow operating profit.
- Refinance at a lower rate.
- Pay down expensive debt.
- Replace debt with [equity](/glossary/equity).