The interest coverage ratio tells you how many times a company's earnings can cover its interest payments. Formula: ICR = EBIT ÷ Interest Expense. An ICR of 5x means the company earns five times more than it needs to pay interest. Below 1.5x is danger territory — the company barely earns enough to service its debt.
Example: A company with EBIT of $10 million and annual interest of $2 million has an ICR of 5.0x — healthy. If EBIT drops to $3 million, ICR falls to 1.5x — barely covering interest. Below 1.0x means the company cannot cover interest from operations and must borrow more or sell assets — a death spiral for many companies.
Credit rating agencies heavily weigh ICR: AAA-rated companies typically have ICR above 8x; BBB-rated (investment grade minimum) usually above 3x. During the 2020 COVID shutdown, thousands of companies saw EBIT collapse while interest obligations remained fixed — highlighting why low ICR companies are vulnerable during downturns. RBI uses ICR as a key metric for assessing corporate credit health.