Interest coverage ratio

Operating profit divided by interest expense. How many times over the trading profit covers the cost of the debt.

A company earning ₹960 crore of operating profit against ₹140 crore of interest covers 6.86 times.

It is the most direct measure of financial distress risk in the accounts, and it degrades faster than leverage ratios do, because it responds both to falling profit and to rising rates. A company at six times with fixed-rate debt and one at six times with floating-rate debt in a tightening cycle are in different positions.

Below about two and a half times, the equity begins to behave like an option on a recovery.

Compute it on EBITDA as well, to see the cash version.