How many times over a company's operating earnings cover its interest payments. Below 5× is the warning zone.
Formula
Interest Coverage = EBIT / Interest Expense
What it is
EBIT divided by interest expense. An interest coverage of 12× means the company's operating profit covers its interest 12 times - even a 90% drop in earnings would still leave enough to pay debtholders.
Why it's the most underrated leverage metric
Debt/Equity tells you how leveraged a company is at a static point in time. Interest coverage tells you whether the company can actually afford the debt. A high D/E with high interest coverage is fine. A modest D/E with low interest coverage is fragile.
What "good" looks like
> 15×: fortress - debt is essentially riskless
5–15×: comfortable - most healthy businesses
3–5×: tight - recession would be uncomfortable
< 3×: warning - a normal business cycle dip could cause distress
< 1×: actively losing money on debt service. Acute risk.
Pair with debt maturity
A company with high coverage but $5B due next year and $100M of cash is in trouble even if its income statement looks healthy. Always look at the debt maturity schedule alongside coverage.