Can the company comfortably pay the interest on its loans?
Interest Coverage Ratio
Lesson 8 of 11 · Safety
Interest coverage is how many times the company's operating profit could pay its yearly interest bill.
In everyday life
If you earn ₹50,000 a month and your loan EMI's interest is ₹5,000, you could pay it ten times over. If you earn ₹6,000, one bad month means trouble.
How it's worked out
Example: Sunrise Tea, a made-up company that sells packaged tea across India.
In words: Operating profit could pay the interest bill 11 times over.
Try it yourself
Move the sliders and watch the answer, the picture and the verdict change together.
Operating profit could pay the interest bill 11 times over.
Rough guide
- Danger
- Tight
- Comfortable
What's a good number?
- Danger
Up to 1.5x
- Tight
1.5x to 3x
- Comfortable
Above 3x
Below 1.5x, a small fall in profit could mean the company can't pay its lenders. A company with no loans has nothing to cover.
How to read it
Good signs
- Above 5x through good and bad years.
Watch out for
- Coverage falling because interest is rising faster than profit.
- Below 1x: the business isn't earning enough to pay its interest.
Read it with
For learning only. Example companies are made up, and the rough guides are rules of thumb, not targets. Nothing here is advice to buy or sell any stock.