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
Live example
Apple Inc. (AAPL) last printed at $345.33 with a market cap of $5.04T. Apply the formula on this page to that live price. Where the quote is missing an input, the stock page's financials are the next place to read it.
Related
Debt to Equity · Operating Margin · Free Cash Flow
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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.