Interest Coverage Ratio
Accounting glossary · Understand, connect, apply
Interest coverage measures a stated earnings amount relative to interest expense. A common version divides earnings before interest and tax, or EBIT, by interest expense to assess the earnings buffer for interest.
Example
EBIT is 45,000 and interest expense is 9,000. EBIT-based interest coverage is 5 times, before considering cash timing or principal repayments.
Formula and assumptions
EBIT-based interest coverage = EBIT ÷ interest expense
Remember the difference
Coverage definitions in loan agreements may use adjusted earnings or different interest amounts. EBIT is not cash, and this ratio does not measure the ability to repay loan principal. Zero interest makes the simple ratio undefined.
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Published 4 November 2026. Prepared with AI assistance; examples are fictional and simplified for learning.
Examples are simplified for learning. Where a term depends on US law, IFRS, US GAAP or a historical rule, check the context explained above and the requirements relevant to your course.
Study references: OpenStax financial accounting and managerial accounting. For reporting requirements, consult the applicable IFRS Standards or FASB guidance. US tax terms should be checked against the relevant tax-year IRS instructions.
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