Interest coverage

Operating profit divided by the interest charge - how many times over the year's earnings could pay the year's cost of borrowing.

Example

Northgate's 550,000 of operating profit over 90,000 of interest is 6.1 times, up from 4.4 times.

Important

Coverage answers whether today's payments are comfortable; it says nothing about whether the total borrowing can be refinanced. Read it alongside net debt to EBITDA, because the two answer different questions.

Related terms

• Net debt — Borrowings minus cash. The measure of indebtedness that accounts for the money already sitting in the bank to repay it.
• Operating margin — Operating profit as a percentage of revenue - what is left after the costs of running the business but before interest and tax. It asks whether the business around the product makes money.
• EBITDA — Earnings before interest, tax, depreciation and amortisation - in practice, operating profit with the depreciation and amortisation charge added back.

Lessons that explain it

• Appraising one fund: where returns came from, and how often deals lost money — A buyout track record is judged by its dispersion, its loss rate and the source of its gains, not by the average multiple. (13 min)
• Leverage turns a 35% fall into an 87% loss, and the fees arrive regardless — The main risks of buyouts are leverage working in reverse, illiquidity and layered fees, and tax treatment depends on jurisdiction and structure. (12 min)
• Appraising one company: the figures, and the growth already in the price — A practical pass over one listed business - what it earns, what it owes, what cash it keeps, and what the current price is already assuming. (14 min)
• What the three say together — Each statement answers a question the others cannot, and the interesting information is almost always in the disagreements between them rather than in any single figure. (14 min)

All 578 terms in the Investing glossary