Interest Coverage
Tier 1 · Existential Pillars · 1.5× weightCan the company's earnings comfortably cover what it owes the bank?
Interest coverage ratio measures the number of times a company's operating income can cover its interest expense obligations — calculated as Operating Income divided by Interest Expense. It activates as the primary solvency signal when a company carries net debt but remains operationally profitable: the question shifts from 'do they have enough cash?' to 'can their earnings service what they owe?' A ratio below 1.0x means the company cannot cover interest from operations alone, a structural red flag. Sector-specific ceilings reflect earnings volatility: Tech/SaaS targets 10× given revenue cyclicality; stable industrials require only 4× for a perfect score.
A company can be profitable and still get wiped out by debt it can't service. Interest coverage bridges the gap between the balance sheet and the income statement — it tells you whether the business engine is strong enough to carry the debt load. This is why it sits in Tier 1 alongside Cash vs Debt: solvency has two questions, and this is the second one.
Sector ceilings reflect how volatile each business model's earnings are. Tech/SaaS requires 10× coverage for a perfect score because revenues can drop fast — you need a big buffer. Industrials and utilities only need 4× because their cash flows are stable and predictable. FinTech targets 8×. Healthcare 8×. Consumer/Retail 6×. The floor is universal: 1.0× coverage scores 0/10 across all sectors.
Coverage meets or exceeds sector ceiling (e.g. 10× for Tech) — debt load negligible vs earnings
Coverage halfway between floor (1×) and sector ceiling — debt is being serviced but headroom is limited
Coverage at or below 1× — operating income barely or doesn't cover interest payments