Interest Coverage

Can it comfortably pay its interest?

Interest coverage shows how easily a company's operating profit covers its interest payments. It's a direct test of whether debt is a manageable burden or a looming risk. Interest coverage = Operating profit ÷ Interest expense Operating profit Rs 400, interest Rs 100. Coverage = 4. Profit covers interest four times over. High coverage Interest is easily covered, debt looks safe. Low (near 1–2) Little cushion; a dip in profit could mean trouble. Below 1 Operating profit doesn't cover interest, serious risk. Direct debt-safety test Pairs with debt-to-equity Easy to read Single year can mislead Ignores debt repayment timing Operating profit can be lumpy

Part of Learn NEPSE Investing, a free course on reading Nepali company accounts and charts. Section: The Ratios.