Interest Coverage Ratio
Ability to service debt from profits.
Formula
Interest Coverage Ratio = Operating Profit ÷ Interest Expense
Real World
When Thames Water's interest coverage ratio fell below 1.5x in 2023, lenders raised alarm bells — the business was barely generating enough profit to cover its £1.4bn annual interest bill.
Exam Focus
Always state what the ratio means in context: a ratio below 1.5 signals danger; above 3 is generally considered safe.
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