Interest Coverage Ratio (ICR)

Interest Coverage Ratio (ICR) is a measure of the number of times a company could make the interest payments on its debt with its EBIT.  Interest Coverage Ratio (ICR) is also known as Debt Service Coverage Ratio.

Interest Coverage Ratio (ICR)

Interest Coverage Ratio (ICR) is a measure of the number of times a company could make the interest payments on its debt with its EBIT.  Interest Coverage Ratio (ICR) is also known as Debt Service Coverage Ratio.

 

Interest Coverage Ratio Formula

Refer to Debt Service Coverage Ratio.



Interest Coverage Ratio Interpretation 

The Interest Coverage Ratio determines how easily a company can pay interest expenses on outstanding debt. Less earnings are available to meet interest payments when the ICR is low and the business is more vulnerable to increases in interest rates.

When a company's Interest Coverage Ratio is 1.5 or lower, its ability to meet interest expenses is dubious. When a company's Interest Coverage Ratio is below 1.0, generating sufficient cash to pay its interest obligations is very difficult.



A higher ratio indicates a better financial health as it means that the company is more capable to meeting its interest obligations from operating earnings. On the other hand, a high ICR may suggest a company is "too safe" and is neglecting opportunities to magnify earnings through leverage.


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