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A measure of a company's ability to pay interest on its outstanding debt, calculated by dividing operating income (EBIT) by interest expense.
A higher interest coverage ratio indicates a greater ability to service debt. A ratio of 5x means the company earns five times what it needs to cover its interest payments. Generally, a ratio above 3x is considered healthy, while below 1.5x is a warning sign. The ratio is particularly important for evaluating companies with significant debt, such as utilities, telecom companies, and real estate firms. During economic downturns, declining revenues can compress this ratio quickly, potentially leading to debt distress or default if the ratio drops below 1x.