Interest Coverage Ratio (ICR)

The Interest Coverage Ratio (ICR) measures a company’s ability to pay interest on its outstanding debt using its operating income. It indicates how comfortably a business can meet its interest obligations before tax and non-operating expenses.

ICR Formula:

ICR=EBIT/Interest Expense

A higher ratio signifies greater financial stability. An ICR below 1 suggests that a company isn’t generating enough operating profit to cover its interest expenses, indicating elevated credit risk.

Lenders and investors closely monitor this ratio, especially in debt-heavy industries or volatile markets.