What is Interest Coverage Ratio?
Interest Coverage Ratio measures how many times over you can pay your interest obligations from operating earnings. It reveals whether your business generates enough profit to comfortably service debt.
Why Interest Coverage Matters
Lenders watch this ratio closely. If it falls below 1.0, you are not earning enough to cover interest payments, which means you are either drawing down cash reserves or taking on more debt just to pay existing debt. That is a death spiral.
For founders with venture debt, revenue-based financing, or credit lines, tracking interest coverage ensures your debt remains manageable as you scale.
Safe Thresholds
A ratio above 2.5 is generally considered safe. Between 1.5 and 2.5 warrants monitoring. Below 1.5 signals potential debt service problems.
Formula
Interest Coverage Ratio = EBIT ÷ Interest Expense
Or: Interest Coverage = Operating Income ÷ Interest Expense
Example
Your SaaS company has:
- EBIT: $300,000
- Annual Interest Expense: $75,000 (venture debt)
Interest Coverage = $300,000 ÷ $75,000 = 4.0
You can pay your interest obligations 4 times over from operating earnings. That is comfortable coverage that leaves room for profit and reinvestment.