About

The Interest Coverage Ratio (ICR) is a critical solvency metric determining a company's ability to pay interest on its outstanding debt. Unlike liquidity ratios which look at short-term cash, ICR evaluates long-term financial endurance. It answers the question: How many times can the company pay its interest expenses using its current earnings?

This tool flags potential "Zombie Companies" - firms that are just barely able to service the interest on their debts, leaving no capital for growth or principal repayment. Analysts closely monitor this ratio; a consistent decline often precedes credit rating downgrades and bankruptcy.

Formulas

The ratio is calculated using Earnings Before Interest and Taxes (EBIT):

ICR = EBITInterest Expense

If EBIT is not available, it can be approximated as:

EBIT = Net Income + Interest + Taxes

Reference Data

ICR Range	Status	Analyst Interpretation
≥ 3.0	Healthy	Strong financial position. Capable of weathering downturns.
1.5 − 2.9	Stable	Adequate, but monitor closely during revenue dips.
1.0 − 1.4	Warning	Vulnerable. Cash flow issues likely imminent.
< 1.0	Zombie / Distress	Cannot pay interest from earnings. Must sell assets or borrow more.

Frequently Asked Questions

A Zombie Company is an older firm (typically >10 years old) that has had an Interest Coverage Ratio of less than 1.0 for three consecutive years. They survive only by refinancing debt, effectively kicking the can down the road.

EBIT includes Depreciation and Amortization, which are non-cash expenses but represent the real cost of capital assets aging. For capital-intensive industries, EBIT is a more conservative and accurate measure of sustainable operating income than EBITDA.

Extremely high ICRs (e.g., >10) might indicate the company is too conservative with leverage and is missing opportunities to grow by utilizing cheap debt.