When evaluating a company’s ability to handle its debt, one important metric that investors often check is the Interest Coverage Ratio (ICR). This ratio tells you how easily a company can pay interest on its outstanding debt.
Let’s understand the meaning, formula, and how Indian investors can use it with real examples.
What is interest coverage ratio?
The Interest Coverage Ratio measures how many times a company’s earnings can cover its interest expenses during a specific period (usually a year).
Interest Coverage Ratio (ICR) Formula:
ICR = EBIT ÷ Interest Expense
Where:
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EBIT = Earnings Before Interest and Taxes
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Interest Expense = Total interest payable on debt
In simple words:
It shows how comfortably a company can meet its interest payments from its operating profits.
Why interest coverage ratio matters for Indian investors
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Higher ICR = Better ability to pay interest
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Lower ICR = Higher risk of default
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ICR below 1 = Red flag (means company’s earnings aren’t enough to pay even one year’s interest)
This is especially important for companies with high debt or operating in cyclical sectors like metals, infrastructure, and real estate.
Example of interest coverage ratio calculation (Indian company context)
Let’s take JSW Steel as an example:
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EBIT for FY24: Rs 18,000 crore
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Annual Interest Expense: Rs 4,500 crore
ICR = 18,000 / 4,500 = 4
This means JSW Steel earns 4 times its interest cost, suggesting it can comfortably service its debt for now.
What is considered a good interest coverage ratio?
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Below 1: Serious financial trouble
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1 – 2: Weak, risky zone
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2 – 3: Moderate risk
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Above 3: Comfortable
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Above 5: Very safe (especially for capital-heavy businesses)
However, the right level depends on industry type:
| Sector | Typical Interest Coverage Ratio |
|---|---|
| FMCG (like Nestle India) | 10+ |
| IT (like Infosys, Wipro) | 20+ (as debt is minimal) |
| Capital-intensive sectors (like L&T, Tata Steel) | 2 – 5 |
| NBFCs/Banks (like HDFC Bank) | Not relevant (use other banking ratios) |
Things to watch along with ICR
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Trends over time: Is ICR improving or falling year-on-year?
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EBIT growth: Is operating profit rising in line with debt?
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Debt levels: Look at Debt-to-Equity ratio alongside ICR for a clearer picture
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Sector comparison: Always compare ICR with peers in the same industry
Final takeaway
For Indian investors, the Interest Coverage Ratio is a quick way to check if a company’s profits can handle its debt burden. Combine this with other debt ratios like Debt-to-Equity for better analysis.
Strong earnings and good ICR usually signal a safer investment when looking at debt-heavy Indian companies.
