Interest coverage
EBIT (or EBITDA) divided by interest expense. Measures how comfortably operating profit covers debt-service obligations. Below 3x is the credit-risk zone.
Interest coverage = EBIT / Interest expense (or EBITDA / Interest)Interest coverage divides operating profit (EBIT or EBITDA) by interest expense, expressing how comfortably the operating business can service its debt. A ratio of 5x is comfortable; 3x is the conventional credit-risk threshold below which lenders begin demanding higher spreads; below 1.5x is distress territory. EBIT-based coverage is the more conservative version (it nets out depreciation, which is real); EBITDA-based coverage is the looser version preferred by leveraged-finance markets. We use both, with EBIT coverage as the primary lens for capital-intensive businesses where depreciation is economically meaningful. Coverage ratios are sensitive to interest-rate environments: a company comfortable at 5x coverage at 4% interest rates may compress to 2x at 8% rates if debt is floating or maturing into a higher rate environment, which is why we always pair the ratio with a duration-weighted view of the debt schedule.