Balance sheet
Interest Coverage
Interest coverage shows how many times operating profit covers the interest bill.
Debt to equity is a stock of obligations. Interest coverage is whether this year's profit can service them. Coverage of 8 means operating profit could fall a long way before the coupon is threatened. Coverage of 1.2 means a modest downturn puts the lender ahead of the shareholder.
Use operating income, not a one-time gain, as the numerator. And remember that coverage can look fine while a large principal repayment is due. Maturity matters as much as the coupon. A company can 'cover interest' and still need to refinance a bond it cannot roll.
Formula
Interest coverage = operating income ÷ interest expense
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Questions
What coverage is comfortable?
Above 4 is generally comfortable for a non-financial firm. Cyclical businesses need more at the peak, because the numerator will fall.
What if interest expense is tiny?
Coverage becomes a huge number and stops being informative. Say 'net cash' and move on.