Legal Definitions - interest-coverage ratio

The interest-coverage ratio is a financial metric that measures a company's ability to pay its interest expenses on outstanding debt. It is calculated by dividing a company's earnings before interest and taxes (EBIT) by its interest expenses.

For example, if a company has an EBIT of $1 million and pays $200,000 in annual interest expenses, its interest-coverage ratio would be 5x ($1 million / $200,000).

A higher interest-coverage ratio indicates that a company is more capable of meeting its interest obligations and is therefore considered less risky by lenders and investors. Conversely, a lower interest-coverage ratio suggests that a company may struggle to make its interest payments and could be at risk of defaulting on its debt.

Overall, the interest-coverage ratio is an important measure of a company's financial health and is closely monitored by analysts and investors.