{"id":28600,"date":"2023-10-16T16:01:21","date_gmt":"2023-10-16T16:01:21","guid":{"rendered":"https:\/\/swoopfunding.com\/ca\/?post_type=business-glossary&p=28600"},"modified":"2025-04-24T13:53:09","modified_gmt":"2025-04-24T13:53:09","slug":"interest-coverage-ratio","status":"publish","type":"business-glossary","link":"https:\/\/swoopfunding.com\/ca\/business-glossary\/interest-coverage-ratio\/","title":{"rendered":"Interest coverage ratio"},"content":{"rendered":"

Definition<\/h3>\n

The interest coverage ratio (ICR) is a financial metric used to assess a company’s ability to meet its interest payments on outstanding debt. <\/span><\/p>\n

What is interest coverage ratio?<\/h3>\n

The ratio measures the extent to which a company’s operating income<\/a> can cover its interest expenses. A higher ICR indicates a stronger ability to fulfil interest obligations, which is an important consideration for creditors and investors.<\/span><\/p>\n

The interest coverage ratio is calculated using the following formula:<\/span><\/p>\n

Interest coverage ratio = operating income \/ interest expenses\u00a0<\/span><\/p>\n

A ratio of 1 or lower suggests that a company’s operating income is just enough to cover its interest expenses. This is often seen as a red flag, as it indicates a lower margin of safety for debt servicing. On the other hand, a ratio greater than 1 indicates that a company generates more operating income than is required to cover its interest expenses, which is generally viewed as a positive sign. Be aware that a significantly high ICR can indicate that a company may not be efficiently using its debt to generate returns, as it has an excess capacity to cover interest costs.<\/span><\/p>\n

For investors, the ICR is an important indicator of a company’s financial stability. A healthy ICR suggests that the company has the capacity to meet its financial obligations<\/a>, which can enhance investor confidence.\u00a0<\/span><\/p>\n

While the ICR provides valuable information about a company’s debt-servicing capacity, it does not provide a complete picture of its overall financial health. It does not account for other obligations like principal repayments, or consider future investments and capital expenditures.<\/span><\/p>\n

Example of interest coverage ratio<\/h3>\n

XYZ Corporation has an operating income of $500,000 and incurs an interest expense of $100,000 during a specific period.<\/p>\n

With this information the interest coverage ratio can be calculated as:<\/p>\n

Interest coverage ratio = $500,000 \/ $100,000 = 5<\/span><\/span><\/span><\/p>\n

The interest coverage ratio of 5 indicates that XYZ Corporation’s operating income is sufficient to cover its interest expense five times over.<\/p>\n","protected":false},"author":1,"template":"","class_list":["post-28600","business-glossary","type-business-glossary","status-publish","hentry"],"acf":[],"featured_image_urls_v2":{"full":"","thumbnail":"","medium":"","medium_large":"","large":"","1536x1536":"","2048x2048":"","image_blog":"","image_blog_full":"","image_podcast":"","image_banking":"","image_blog_internal":"","image_blog_medium":"","image_single_banking":""},"post_excerpt_stackable_v2":"

Definition The interest coverage ratio (ICR) is a financial metric used to assess a company’s ability to meet its interest payments on outstanding debt. What is interest coverage ratio? The ratio measures the extent to which a company’s operating income can cover its interest expenses. A higher ICR indicates a stronger ability to fulfil interest obligations, which is an important consideration for creditors and investors. The interest coverage ratio is calculated using the following formula: Interest coverage ratio = operating income \/ interest expenses\u00a0 A ratio of 1 or lower suggests that a company’s operating income is just enough to…<\/p>\n","category_list_v2":"","author_info_v2":{"name":"root","url":"https:\/\/swoopfunding.com\/ca\/author\/root\/"},"comments_num_v2":"0 comments","_links":{"self":[{"href":"https:\/\/swoopfunding.com\/ca\/wp-json\/wp\/v2\/business-glossary\/28600","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/swoopfunding.com\/ca\/wp-json\/wp\/v2\/business-glossary"}],"about":[{"href":"https:\/\/swoopfunding.com\/ca\/wp-json\/wp\/v2\/types\/business-glossary"}],"author":[{"embeddable":true,"href":"https:\/\/swoopfunding.com\/ca\/wp-json\/wp\/v2\/users\/1"}],"version-history":[{"count":1,"href":"https:\/\/swoopfunding.com\/ca\/wp-json\/wp\/v2\/business-glossary\/28600\/revisions"}],"predecessor-version":[{"id":39009,"href":"https:\/\/swoopfunding.com\/ca\/wp-json\/wp\/v2\/business-glossary\/28600\/revisions\/39009"}],"wp:attachment":[{"href":"https:\/\/swoopfunding.com\/ca\/wp-json\/wp\/v2\/media?parent=28600"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}