Interest Coverage

Interest Coverage is a measure of a company's ability to make its interest payments using income generated by the business. Creditors are especially interested in this measure of interest coverage, since it is a good indicator of whether or not a company will be able to meet future interest obligations through continuing operations.

The calculation of interest coverage is as follows:

Operating Income / Annual Interest Expense

As a general rule, the interest coverage ratio should be around 3 or higher.  If this ratio falls below 1, it is an indication that a company may default on its loans.