Interest Coverage Ratio
Interest coverage is EBIT (or EBITDA) divided by interest expense — how many times operating profit can pay the coupon bill.
Definition
Coverage = EBIT / interest (or EBITDA / interest, or CFO / cash interest). Below ~2× is where credit desks start writing a default path. Capitalized interest and PIK coupons can make the ratio look healthier than cash.
Why it matters
Leverage ratios are stock; coverage is the flow that keeps you out of default. Rising rates hit coverage before they hit the debt/EBITDA vintage.
Case
A 2021 LBO printed 5× EBITDA/interest on 4% coupons. Refi at 9% cut coverage in half with unchanged EBITDA. The sponsor’s model had a rate assumption, not a law.
How to read it
Use cash interest when PIK and capitalized interest are material. Stress EBITDA −20% and rates +200bp before you trust the headline.