Interest coverage (Int. coverage)
How many times over operating profit covers the interest bill.
It is the single most direct measure of whether the debt is survivable, and it is what credit analysts and lenders key on.
How it is computed here
Operating income / interest expense
Combines more than one basis. See the note. The pipeline prefers the data vendor's published trailing-twelve-month ratio when one exists, and falls back to recomputing from the latest filed fiscal year when it does not. Those two are different measurements: the vendor figure puts twelve months of flow over the most recent quarterly balance sheet. The source trail on each figure names which path produced it. Filed under health. Higher is the stronger reading, other things equal.
The readings, and where the lines come from
| Range | Reading |
|---|---|
| below 1.50x | Distress territory |
| 1.50x to 3.00x | Speculative grade |
| 3.00x to 6.00x | Investment grade |
| 6.00x and above | Comfortable |
Damodaran's synthetic-rating table maps interest coverage to bond ratings; the edges below are its investment-grade boundaries.
When it misleads
- A company with no interest expense at all is not shown as infinity. The figure is withheld with the reason, because a debt-free balance sheet is a different fact from good coverage.
- Uses operating profit, not cash. A company can cover interest on paper and not in the bank.
- Meaningless for banks, where interest is both an expense and the core revenue line.
Not meaningful for banks, insurers: the product prints n/m with the reason rather than a number for them.
Questions
How is interest coverage calculated?
Operating income / interest expense. Combines more than one basis. See the note. The pipeline prefers the data vendor's published trailing-twelve-month ratio when one exists, and falls back to recomputing from the latest filed fiscal year when it does not. Those two are different measurements: the vendor figure puts twelve months of flow over the most recent quarterly balance sheet. The source trail on each figure names which path produced it.
What does interest coverage tell a value investor?
It is the single most direct measure of whether the debt is survivable, and it is what credit analysts and lenders key on.
When does interest coverage mislead?
A company with no interest expense at all is not shown as infinity. The figure is withheld with the reason, because a debt-free balance sheet is a different fact from good coverage. Uses operating profit, not cash. A company can cover interest on paper and not in the bank. Meaningless for banks, where interest is both an expense and the core revenue line.