Definition
Interest coverage ratio measures how easily a business can pay interest from operating earnings.
Formula
Interest coverage = EBIT / interest expense (common)
Example
If EBIT is $2M and interest expense is $400k, coverage is 5.0x.
How to use it
- Low coverage increases financing risk and can constrain growth.
- Use cash flow based views when earnings are noisy or non-cash heavy.
- Track trendline coverage, not just a single quarter.
Common mistakes
- Using EBITDA instead of EBIT without noting the difference.
- Ignoring seasonality that makes coverage appear worse in slow quarters.
Why this matters
This term matters because cash timing and risk are usually the difference between a plan that works on paper and a plan that survives. Use consistent definitions so decisions are comparable over time.
Practical checklist
- Write a 1-line definition for "Interest Coverage Ratio" that your team will use consistently.
- Keep the time window consistent (weekly/monthly/quarterly) when comparing trends.
- Segment results (channel/plan/cohort) before drawing big conclusions from blended averages.
- Sanity-check with a related calculator from the same category on MetricKit.
- Read the related guide (e.g., Loan amortization: how monthly payments and total interest work) for context and common pitfalls.
Where to use this on MetricKit
Calculators
- Cash Runway Calculator: Estimate runway from cash balance, revenue, gross margin, and operating expenses (optionally with revenue growth).
- Break-even Pricing Calculator: Compute contribution margin, break-even units, and profit at a given volume based on price and variable costs.
- DCF Valuation Calculator: Estimate enterprise value using a simple DCF: forecast cash flows, apply a discount rate (often WACC), and add a terminal value.
- Investment Decision Calculator: Evaluate an investment using NPV, IRR, discounted payback, and profitability index from simple cash flow assumptions.
- Profitability Index Calculator: Calculate profitability index (PI) from discounted cash flows and estimate the max investment for a target PI.
Guides
- Loan amortization: how monthly payments and total interest work: A practical guide to loan amortization: monthly payment formula, why interest dominates early, and how term and rate affect total interest.