Translation: Interest Coverage Ratio = Interest Coverage Ratio.

Simple Definition: It is a financial indicator that measures the extent to which a company is able to pay "debt burdens" (bank interest) through the profits it achieves from its primary business operations. In other words, it is a "safety measure" that determines how many times a company can cover its interest expenses using its current profits before paying taxes.

How is it calculated? Interest Coverage Ratio = (Earnings Before Interest and Taxes) ÷ (Interest Expenses) Example: If a company generates operating profits of 100 million riyals, and it has bank interest expenses of 20 million riyals, then the ratio equals 5 times. This means that the company's profits are sufficient to cover interest 5 times, giving it a comfortable safety margin.

What does this mean to you?

  • Indicator of Solvency and Sustainability: A high ratio indicates a strong financial position and the company's high ability to fulfill its obligations to lenders without affecting its operational liquidity.
  • Risk of Financial Distress: When the ratio approaches (1), it means the company barely covers its debt interest. But if it is less than (1), this is a warning indicator (alarm bell), because the company does not generate sufficient profits to cover interest, which forces it to deplete its own cash or borrow again to pay interest, which is an unsustainable situation.
  • Operating Deficit (Negative Ratio): In the case of companies suffering from operating losses, the ratio becomes negative. This means that the company does not generate any profits in the first place, and financing expenses deepen losses, putting the company in the danger circle of "insolvency crisis".

Common Question: Why do banks and investors care about this ratio specifically when granting loans?

Answer: Because it is a "measure of borrowing efficiency". Banks do not like to lend to companies that consume their entire profits paying interest on previous debts, because that means a high risk of being unable to pay the principal debt in the future. Therefore, this ratio is the "first filter" that determines whether a company qualifies for additional financing or if it has reached its maximum borrowing capacity (Debt Capacity).