Which ratio measures a company's ability to cover interest payments?

The ratio that measures a company’s ability to cover interest payments is the interest coverage ratio.

It is commonly calculated as EBIT divided by interest expense; some analysts use EBITDA instead. The result is expressed in times. For example, a 4× ratio means operating earnings are four times the period’s interest bill. The measure is also called the times-interest-earned ratio.

Lenders and investors use it to assess debt-servicing pressure. A ratio below 1× means reported operating earnings are insufficient to cover interest, while a declining ratio can signal rising financial risk even when it remains above 1×. Thresholds vary by industry and business stability.

A common mix-up is the debt service coverage ratio, which generally considers cash available for both interest and principal repayments. Fixed charge coverage is broader still: it may include lease payments and other contractual fixed charges. Operating leverage, by contrast, describes how fixed operating costs affect profits; it is not a direct test of interest-paying capacity.