Interest Coverage Ratio
Definition
The ratio of earnings before interest and taxes (EBIT) to interest expense, measuring a company's ability to meet its interest obligations from operating profits. A higher ratio indicates greater financial headroom and lower default risk. Interest coverage is a standard financial covenant in loan agreements and a key input to credit rating assessments, with ratios below 1.5x generally indicating elevated credit risk.
Complementary Terms
Concepts that frequently appear alongside Interest Coverage Ratio in practice.
The ratio of net operating income to total debt service obligations (principal plus interest payments) over a given period, measuring a borrower's ability to service its debt from operating cash flow. A DSCR above 1.0x indicates sufficient cash flow to meet debt payments, while lenders typically require a minimum DSCR of 1.2x to 1.5x as a loan covenant.
A financial metric measuring the proportion of debt in a company's capital structure relative to its earnings, equity, or assets. The most common leverage ratios in corporate finance and lending include net debt to EBITDA, debt to equity, and debt to total assets.
The ratio of a loan amount to the appraised value of the underlying collateral, expressed as a percentage. LTV is a primary risk metric used by lenders to assess the adequacy of collateral coverage — a lower LTV indicates greater equity cushion and lower credit risk.
A financial leverage ratio calculated by dividing total debt by total shareholders' equity, indicating the relative proportion of debt and equity financing in a company's capital structure. A higher ratio indicates greater financial leverage and potentially higher financial risk, while a lower ratio suggests more conservative financing.
A valuation ratio comparing a company's share price to its earnings per share. The P/E ratio indicates how much investors are willing to pay for each pound of earnings and is influenced by growth expectations, risk profile, and the strength of intangible assets.
The share of investment profits that a fund manager (general partner) receives as performance-based compensation, typically 20% of profits above a hurdle rate. Carry is the primary financial incentive for venture capital and private equity fund managers.
A valuation ratio comparing a company's market capitalisation to its book value. A P/B ratio significantly above 1.0 indicates that the market recognises substantial value beyond what is recorded on the balance sheet, typically reflecting intangible assets.
The legal process by which a creditor's security interest in collateral becomes enforceable against third parties, typically through registration (UCC filing, PPSA registration, or Companies House filing), possession of the collateral, or control over financial assets. Perfection establishes the creditor's priority ranking relative to other secured parties.
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