Interest Coverage Ratio: Measure Debt Risk in 2026
Interest Coverage Ratio: Measure Debt Risk in 2026
Debt is not automatically bad. But when interest costs explode, even great businesses can struggle. The interest coverage ratio shows whether a company can pay its interest bill safely.
This article is part of our Complete Guide: How to Analyze a Stock.
What Is the Interest Coverage Ratio?
It measures how many times a company’s operating profit covers its interest expense.
Interest Coverage = EBIT / Interest Expense
Key idea: the higher the ratio, the safer the company’s debt load.
How to Interpret It
| Coverage | Meaning |
|---|---|
| < 1.5x | High risk (debt stress) |
| 1.5–3x | Caution zone |
| 3–8x | Healthy |
| > 8x | Very safe (low debt risk) |
Coverage should be compared within the same sector.
EBIT vs EBITDA (Which One to Use?)
Some analysts use EBITDA to compute coverage (adds back depreciation). That can be useful for asset‑heavy sectors, but EBIT is more conservative.
Rule of thumb:
- Use EBIT for most companies
- Use EBITDA only if depreciation is unusually large and stable
Red Flags to Watch
1. Coverage Falling for 3+ Years
This suggests debt is growing faster than profits.
2. Rising Interest Costs
If rates rise and coverage is already low, refinancing becomes dangerous.
3. Coverage Boosted by One‑Time Gains
Always check normalized earnings.
Interest Coverage vs FCF and ROIC
Coverage is stronger when combined with:
A company with good coverage but weak FCF is still risky.
Sector Benchmarks (Approx.)
| Sector | Typical Coverage |
|---|---|
| Utilities | 2–5x |
| Industrials | 3–7x |
| Consumer Staples | 4–10x |
| Tech | 6–15x |
| Real Estate | 1.5–4x |
Quick Checklist
- Coverage above 3x for 3+ years
- Debt stable or declining
- Interest expense not accelerating
- FCF positive and stable
- No major refinancing wall in 12–24 months
Conclusion
The interest coverage ratio is one of the fastest ways to detect balance‑sheet stress. Combine it with FCF, ROIC, and volatility for a complete risk picture.
Next steps:
- Compare coverage across peers
- Track the trend every quarter
- Stress‑test coverage with higher rates
Explore our 436 stock analyses to see real debt metrics.
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