Introduction
Interest Coverage Ratio measures how many times a company's EBIT can cover its interest expenses. It is the most important metric to evaluate solvency.
Explication
If a company has EBIT of $100M and interest expenses of $20M, it can pay its interest 5 times. The higher the ratio, the safer the debt.
Formule
Interest Coverage = EBIT / Interest Expense
Exemple
Healthy vs. Troubled Company: - Apple: EBIT $120B, Interest $3B → Coverage = 40× (super safe) - Tesla (2019): EBIT $2B, Interest $0.7B → Coverage = 2.9× (adjusted)
Comment l'interpréter
Interest Coverage > 10× = very healthy, very safe debt. 5-10× = healthy. 2-5× = acceptable but monitor. < 2× = risky. < 1× = company does not generate enough to pay interest, possible default/bankruptcy. Rating agencies: AAA requires > 12×, BB requires > 3×. Red flag: coverage declining from 5× to 2× = severe credit deterioration.
Points clés
- Interest Coverage = EBIT / Interest
- Measures ability to pay interest
- Coverage > 10× = very safe
- Coverage < 2× = risky
- Coverage < 1× = possible default
- Declining rapidly = credit deterioration