Interest coverage

Interest coverage is the most direct test of whether debt is a problem. It asks how many times the profit from operations covers what the company owes its lenders each year. Below about 2x there is very little room for a bad quarter.

It matters more than the size of the debt itself. A large borrowing that is comfortably serviced is safer than a small one that is not.

Operating income of $180m and interest expense of $30m.

1. 1180 / 30 = 6.

Every example in this glossary describes the same imaginary company, so the figures join up as you move between metrics.

• Above 5x is comfortable for most businesses. Between 2x and 5x is worth watching. Below 2x, a downturn becomes a solvency question rather than an earnings question.
• Cyclical businesses need more headroom, because the ratio collapses exactly when trading is worst.
• Falling coverage over several years is a leading indicator, and often visible well before a credit rating moves.

• It uses operating income rather than cash, and interest is paid in cash.
• It ignores debt repayments falling due, which can matter more than the interest.
• Companies with no debt have no meaningful ratio, and the metric simply drops out.

One of five metrics in the Financial health category of the scorecard, and a leverage ratio in the Financials tab. Where a company reports no interest expense, the metric drops out and the category reweights proportionally rather than scoring it as perfect.

The full methodology covers where the figures come from, how the statements are normalised, and what is deliberately left unadjusted.