Interest cover ratio

Definition

The interest cover ratio is operating profit (or EBIT) divided by interest expense. It shows how many times over the company's profit could cover the interest it owes — a key gauge of debt affordability.

In plain terms

Cover of 4 means profit is four times the interest bill: comfortable. Cover near 1 means almost all profit goes on interest, leaving no cushion.

Why it matters for your company

Lenders use interest cover, alongside debt service cover, to judge how much borrowing you can carry. See how lenders assess affordability.

In practice

Picture a UK limited company with a mix of trading profit and a modest loan facility. When management reviews its accounts each quarter, interest cover is one of the numbers a sensible finance director tracks alongside cash flow and margin trends, because it turns an abstract debt load into a simple question: could this quarter's profit have absorbed the interest bill comfortably, or would it have been a stretch?

A company with strong, consistent cover has room to invest, take on stock, or ride out a quieter trading period without the interest line becoming a source of stress. A company whose cover has been thinning over successive periods, even if it hasn't yet breached any threshold, is usually the one where a director starts asking harder questions about pricing, overheads, or the pace of borrowing, well before the position becomes urgent.

How lenders read it

Lenders rarely look at interest cover as a single snapshot. They look at the trend across several periods, because a ratio that is falling tells a different story to one that is flat or improving, even if the current figure looks similar. A company whose cover has been sliding is treated with more caution than one holding steady, regardless of where the number happens to sit today.

Lenders also read interest cover alongside other measures, such as debt service cover and gearing, rather than in isolation — a company can look fine on one metric and exposed on another, and it is the combination that shapes how a lender views affordability. For more on how the pieces fit together, see how lenders assess affordability.