The formula
Interest Coverage = Operating Profit (EBIT) ÷ Interest Expense. A ratio of 5 means the company earns five times its interest bill.
How to read it
This is the key test of whether a leveraged company can actually service its debt. Comfort generally starts around 3x and above; below about 1.5x the company is dangerously close to not covering its interest from operations. It matters most precisely when debt-to-equity is high.
A high debt load with strong interest coverage can be fine. A moderate debt load with falling coverage is the more urgent flag.