What is a good interest cover ratio?

There is no level that suits every borrower. A business with steady contracted income can operate safely on less cover than one whose earnings swing with a commodity or a season, and a covenant level is agreed for each facility. What matters is how much earnings could fall, and how far rates could rise, before cover reaches 1.0 times, and whether anything else is due in the same period. A ratio is more informative as a trend than as a single reading.

What does an interest cover of less than 1 mean?

Earnings for the period were smaller than the interest bill. On EBIT, non-cash depreciation may have left enough cash to pay it; otherwise the business paid part of it from cash reserves, new borrowing or asset sales. One such period can be survivable, particularly for a seasonal business or one recovering from a known event, but it cannot continue indefinitely. A negative ratio means the business made an operating loss before interest. EBITDA cover can be above 1 while EBIT cover is below it.

Is interest cover calculated on EBIT or EBITDA?

Both are used. EBIT is the older and stricter form, because it charges depreciation; EBITDA is common in facility agreements because it is closer to cash and to the leverage covenant beside it. For a business whose machines must be replaced to keep earning, EBIT cover or a cash-based measure is the fairer test. When reading a covenant, the agreement's own definition decides which applies and what may be added back.

Did lease accounting change interest cover?

It can. When leases come on to the balance sheet, rent is replaced by depreciation and interest on the lease liability, so EBITDA rises and so does the interest bill. The UK's Financial Reporting Council notes that metrics including interest cover may change as a result of the FRS 102 amendments. A loan agreement may have frozen the accounting basis to prevent this, in which case the compliance certificate restates the accounts to that basis.

// WORKED EXAMPLETHE ARITHMETIC A DECISION RESTS ON

Interest Cover Ratio: a Worked Example

Affording the interest is not the same as affording the loan.

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED 2026-11-09 · 6 MIN READ

// THE SHORT ANSWER

A lender reaches for interest cover when it wants the quickest test of whether a borrower can pay for its debt at all: earnings divided by the interest bill, expressed as a multiple. A result of 3.0 times means earnings could fall by two thirds before interest alone consumed them. The ratio moves with rates as well as trading, so a floating-rate borrower can lose cover without losing a customer. It says nothing about repaying the money, which is why a loan with scheduled principal is also tested on debt service cover.

BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.

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PART OF Credit Analysis for Beginners

// 01 — WHAT THE RATIO ANSWERS

Interest is the one payment on a loan that does not reduce it. A business that cannot earn its interest is borrowing to stay where it is, and each period makes the next one harder. So an early question about a borrower is how many times over its earnings pay that bill. The ratio is simple to compute from almost any set of accounts, which is why it appears in credit papers, in ratings work and in loan covenants, sometimes under the name times interest earned.

It suits debt that has no scheduled repayment: a revolving credit facility, an interest-only period, a bullet loan. In those, interest is all that falls due before maturity, and the ratio measures the whole of the current obligation.

// 02 — HOW IT IS CALCULATED

EBIT cover = earnings before interest and tax ÷ interest expense

EBITDA cover = EBITDA ÷ interest expense

Earnings can fall by: 1 − (1 ÷ cover) before cover reaches 1.0×

The numerator is the first choice. EBIT charges the wear on the assets; EBITDA leaves it out and so reads higher, by most in a capital-heavy business. Credit analysts and textbooks often use EBIT, while many facility agreements test EBITDA. Either way the agreement's own definitions govern a covenant, and those definitions may include add-backs the accounts do not show.

The denominator needs as much care. It can be gross interest or net of interest received. It may leave out interest capitalised into an asset under construction: IAS 23 and its New Zealand and Australian equivalents treat borrowing costs directly attributable to a qualifying asset as part of its cost, and FRS 102 lets a UK company choose to, so a business that is building can pay more interest than its profit and loss shows. Lease interest counts too. Accounts prepared under IFRS 16 and its New Zealand and Australian equivalents carry most leases on the balance sheet, UK accounts under FRS 102 follow for periods beginning on or after 1 January 2026, and rent is replaced in part by interest, which is why many agreements freeze the accounting basis at signing.

// 03 — THE EXAMPLE

A contract bottler, constructed for this page like every figure in it, earns EBITDA of US$8.0m and EBIT of US$5.0m after US$3.0m of depreciation on its lines. It owes US$25m at 6% floating, repayable in equal instalments over five years. Tax and maintenance capital spending take a further US$2.4m. Interest is shown for the first year, before the balance falls.

Interest: 25.0 × 6% = 1.5

EBIT cover: 5.0 ÷ 1.5 = 3.33×

EBITDA cover: 8.0 ÷ 1.5 = 5.33×

If rates rise two points, unhedged: interest 25.0 × 8% = 2.0

EBIT cover: 5.0 ÷ 2.0 = 2.50×

If US$15m is fixed: interest 1.5 + (10.0 × 2%) = 1.7

EBIT cover: 5.0 ÷ 1.7 = 2.94×

Cash available: 8.0 − 2.4 = 5.6

Debt service, 5 yr: 1.5 + (25.0 ÷ 5) = 6.5 5.6 ÷ 6.5 = 0.86×

Debt service, 10 yr: 1.5 + (25.0 ÷ 10) = 4.0 5.6 ÷ 4.0 = 1.40×

On interest cover the bottler looks comfortable, and two points on rates do not change that reading much. The bottom lines tell a different story. Its cash covers the interest several times but not the five-year repayment, and a longer term is what brings debt service above 1.0 times here. Nothing about the bottling lines changed between the two rows; interest cover read 3.33 times in both. The levels are the example's, not a market norm.

// 04 — HOW IT DIFFERS FROM DEBT SERVICE COVER

Debt service cover adds scheduled principal to the denominator and usually starts from cash rather than earnings. On a fully amortising loan, principal is often the larger payment, so a ratio that omits it can look healthy while the repayment schedule is out of reach. The bottler shows the point: its difficulty lies in how fast the loan is meant to be repaid, and a term or amortisation change addresses it directly.

Fixed charge cover widens the denominator further by adding rent. Leverage answers a different question: debt to EBITDA does not move when rates do, while interest cover does, so two borrowers at the same multiple of debt can be in very different positions on interest depending on their margin and hedging.

DEFINED IN ONE PARAGRAPH → · DEBT SERVICE COVER → · THE BREAKEVEN INTEREST RATE →

// 05 — WHERE IT DECIDES A FILE

At origination, a lender commonly runs cover at a higher rate than today's, because a floating loan's interest is the borrower's problem and the lender's risk. The hedging line in the example is why a term sheet may require part of the debt to be fixed or capped. In the covenant, interest cover often stands alongside leverage or debt service cover, and the two can give opposite signals in the same quarter.

It also reads differently when interest stops being paid in cash. Where interest is capitalised or paid in kind, reported cover can look steady while the debt climbs, so a lender reads the movement in the balance alongside the ratio. Where a forecast estimates interest on a large revolver, average drawings matter as well: a year-end balance can understate what the year carried.

LOAN COVENANTS, EXPLAINED → · DEBT TO EBITDA →

// SOURCES

The documents the statements on this page rest on. Each was opened and checked when cited.

IFRS Foundation, IAS 23 Borrowing Costs — overview of the standard — Borrowing costs directly attributable to acquiring, constructing or producing a qualifying asset form part of that asset's cost, the interest that does not reach the profit and loss in section 02.
Financial Reporting Council, FRS 102 Explainer: a summary of the Periodic Review 2024 changes for financial statements users, June 2026 — Lessees bring most leases on balance sheet for periods beginning on or after 1 January 2026, and metrics including interest cover and EBITDA may change — section 02 and the FAQ.

// QUESTIONS PEOPLE ASK

What is a good interest cover ratio?: There is no level that suits every borrower. A business with steady contracted income can operate safely on less cover than one whose earnings swing with a commodity or a season, and a covenant level is agreed for each facility. What matters is how much earnings could fall, and how far rates could rise, before cover reaches 1.0 times, and whether anything else is due in the same period. A ratio is more informative as a trend than as a single reading.
What does an interest cover of less than 1 mean?: Earnings for the period were smaller than the interest bill. On EBIT, non-cash depreciation may have left enough cash to pay it; otherwise the business paid part of it from cash reserves, new borrowing or asset sales. One such period can be survivable, particularly for a seasonal business or one recovering from a known event, but it cannot continue indefinitely. A negative ratio means the business made an operating loss before interest. EBITDA cover can be above 1 while EBIT cover is below it.
Is interest cover calculated on EBIT or EBITDA?: Both are used. EBIT is the older and stricter form, because it charges depreciation; EBITDA is common in facility agreements because it is closer to cash and to the leverage covenant beside it. For a business whose machines must be replaced to keep earning, EBIT cover or a cash-based measure is the fairer test. When reading a covenant, the agreement's own definition decides which applies and what may be added back.
Did lease accounting change interest cover?: It can. When leases come on to the balance sheet, rent is replaced by depreciation and interest on the lease liability, so EBITDA rises and so does the interest bill. The UK's Financial Reporting Council notes that metrics including interest cover may change as a result of the FRS 102 amendments. A loan agreement may have frozen the accounting basis to prevent this, in which case the compliance certificate restates the accounts to that basis.

// NEXT TO IT

// ON WHOSE DESK

The seats that read this term in an ordinary week. Each page says what the seat is for, who arrives in it, and the shape of the round it runs.

Credit analystReads a borrower and writes the recommendation a decision-maker will act on.
Credit sanctionerHolds delegated authority and signs — or declines — the lending the front line brings.
Portfolio managerOwns the credit on a book after the money is out — reviews, covenants, ratings and early warning.

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THE NUMBER · THE LOAN · CAPACITY

A company asks to refinance. Its year in four numbers:

EBITDA: US$6m
Capex + tax: US$2m
Interest: US$1m
Principal due: US$2m

What is its debt service cover, on cash available after capital spending and tax?

5 MORE ON THE LOAN · CAPACITY →WHERE DO YOU READ FROM? THE PLACEMENT →

THE READING ROOMIN ONE PARAGRAPHInterest cover ratio What is interest cover, and how is it different from debt service cover?