Interest Coverage Ratio
Calculate the interest coverage ratio, a solvency ratio that measures a company’s ability to pay its interest expenses on outstanding debt.
The interest coverage ratio evaluates a company’s ability to meet its interest obligations from its earnings before interest and taxes (EBIT), taken as operating income, following the CFA Institute definition. A higher ratio indicates a company’s stronger ability to cover its interest payments using its earnings, implying lower financial risk. Conversely, a lower ratio suggests a company may have difficulty meeting its interest obligations and could be at higher risk of default.
The formula is as follows:
\[\text{Interest Coverage Ratio} = \text{EBIT} / \text{Interest Expense}\]Lenders and rating agencies use interest coverage to judge how much room a company has before its earnings no longer cover its interest bill, and loan covenants often set a minimum. Some covenants use EBITDA instead of EBIT, which gives a higher ratio, most of all for capital-intensive companies. The ratio is NaN when no interest expense is reported, which is often a gap in the reported data rather than an absence of debt.
Also known as: times interest earned (TIE), EBIT interest coverage.
Interest Coverage Ratio in Python or via the MCP
Install the Finance Toolkit with:
pip install financetoolkit -U
Then call get_interest_coverage_ratio as shown below.
from financetoolkit import Toolkit
toolkit = Toolkit(
["MKC", "CPB", "HSY"],
api_key="FINANCIAL_MODELING_PREP_KEY",
start_date="2021-01-01",
end_date="2025-12-31",
)
toolkit.ratios.get_interest_coverage_ratio()
Or, after setting up the Finance Toolkit MCP, ask:
How many times could McCormick, Campbell's and Hershey cover their interest expense from 2021 to 2025?
Which returns:
| 2021 | 2022 | 2023 | 2024 | 2025 | |
|---|---|---|---|---|---|
| CPB | 6.2714 | 6.2381 | 6.9787 | 4.743 | 3.4116 |
| HSY | 15.7396 | 16.1375 | 15.8557 | 16.6262 | 6.8308 |
| MKC | 7.4312 | 5.7921 | 4.6254 | 5.0635 | 5.4577 |
Parameters
get_interest_coverage_ratio accepts the following parameters.
| Parameter | Type | Description | Example |
|---|---|---|---|
rounding | int | None | The number of decimals to round the results to. Defaults to None, which uses the rounding of the Toolkit (4 unless set otherwise). | 2 |
growth | bool | Whether to calculate the growth of the ratios. Defaults to False. | True |
lag | int | list[int] | The lag to use for the growth calculation. Defaults to 1. | 4 |
compound | bool | Whether the growth is the compound annual growth rate over the lag (e.g. lag=5 for the five-year CAGR) instead of the total change. Defaults to False. | False |
standardize | bool | Whether to standardize (Z-Score) the result. When combined with growth=True, standardizes the growth values instead of the raw values. Defaults to False. | True |
trailing | int | The number of periods to sum flows (income and cash flow statement items) over, with balance sheet items averaged over the same number of period ends. E.g. 4 with quarterly data gives the trailing twelve months (TTM) and 3 with annual data a three-year cumulative figure. Defaults to None, which uses single-period flows (per quarter and not annualized with quarterly data). | 4 |