Interest Coverage Ratio
Ability to service debt from profits.
Formula
Interest Coverage Ratio = Operating Profit / Interest Expense
Real World
When interest rates rose sharply in 2023, heavily indebted UK housebuilder Crest Nicholson saw its interest coverage ratio fall, raising concerns about its ability to service loans from falling profits.
Exam Focus
A ratio below 1.5× is considered dangerous — always comment on what a low ratio means for lender confidence and refinancing risk.
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