Interest cover asks whether profits are large enough to service interest on debt. A cover of 1 means earnings just match interest, leaving no cushion. Higher cover is safer, though what counts as healthy depends on the industry and how stable earnings are. Falling cover can warn that leverage is becoming dangerous before a formal default. Always check which profit figure the ratio uses, because definitions vary slightly across reports and textbooks.
Key takeaways
- It is a simple stress test of debt service from earnings.
- Low or falling cover raises refinancing and default risk.
- Stable businesses can carry more debt than cyclical ones at the same cover.
- Pair it with cash flow checks, not profit alone.