Interest Coverage Ratio (ICR) is a key financial metric that measures a companyís ability to meet its interest payment obligations from its operating profits. It helps investors and lenders assess how comfortably a business can handle its debt-related expenses without facing financial distress.

Formula: Interest Coverage Ratio = EBIT ˜ Interest Expense Where EBIT stands for Earnings Before Interest and Taxes.

Example: If a companyís EBIT is ?10 crore and its annual interest expense is ?2 crore, the ICR would be 5. This means the company earns five times the amount needed to pay its interest, indicating strong debt-servicing capability.

Interpretation: A higher ratio suggests better financial health, as the company generates sufficient profits to cover its interest obligations multiple times over. Conversely, a low or declining ratio may signal financial strain or excessive borrowing. As a rule of thumb, an ICR above 3 is generally considered healthy, though acceptable levels vary by industry.

Importance of ICR:

• Helps lenders and investors evaluate creditworthiness and risk of default.
• Enables management to monitor debt sustainability and plan financing decisions.
• Used in financial analysis and credit rating assessments to gauge a firmís solvency.

Limitations: While useful, the ratio only focuses on interest expenses and ignores principal repayments. It may also give a misleading picture if profits are volatile or influenced by one-time gains.

Conclusion: The Interest Coverage Ratio serves as a crucial indicator of a companyís financial stability and debt management efficiency. Investors and analysts often use it alongside other leverage and liquidity ratios to form a comprehensive view of a companyís financial health.