What is Interest Coverage Ratio?

Published

April 22, 2026

Last updated

April 22, 2026

Definition

The Interest Coverage Ratio (ICR) is a key financial metric used to assess how easily a company can meet its interest payment obligations on outstanding debt. Lenders, investors, and creditors use this ratio to gauge the company's risk profile; a lower ratio suggests a higher debt burden and an increased risk of default. It is a critical component of credit analysis and is frequently included as a covenant in lending agreements.

The ratio is calculated by dividing a company's Earnings Before Interest and Taxes (EBIT) or EBITDA by its interest expense for a given period. While analysts often consider a ratio of 1.5 to be a minimum acceptable level, the definition of a "good" ratio can vary significantly by industry. Tracking ICR is an essential part of ongoing financial planning and is considered one of the core Financial KPIs for solvency.

Related terms

Financial Risk

Frequently Asked Questions

How do you calculate interest coverage ratio?

The Interest Coverage Ratio is calculated by dividing a company’s Earnings Before Interest and Taxes (EBIT) by its total interest expense for the period.

Is interest coverage ratio EBIT or EBITDA?

The calculation can use either EBIT or EBITDA in the numerator, although EBIT is more traditional and conservative as it accounts for depreciation and amortization.

What is the difference between DSCR and ICR?

The Interest Coverage Ratio (ICR) measures a company's ability to pay interest expenses, while the Debt Service Coverage Ratio (DSCR) is broader, assessing its ability to cover all debt obligations, including principal payments.

What does a high ICR indicate?

A high Interest Coverage Ratio indicates that a company generates more than enough earnings to cover its interest expenses, signaling strong financial health and a low risk of default on its debt.