Interest Cover Ratio
A measure of how easily a business can pay its interest obligations from its operating profit.
The interest cover ratio (ICR) measures how many times a business's operating profit (or EBITDA) covers its annual interest payments. It is calculated as EBITDA divided by total annual interest expense. A ratio of 2x means the business generates twice as much operating profit as it needs to service its debt interest.
Lenders use ICR as a key covenant in commercial lending, typically requiring a minimum ICR of 1.5x to 2.5x. A business with £500,000 EBITDA and £200,000 annual interest costs has an ICR of 2.5x. If EBITDA falls to £250,000, the ICR drops to 1.25x, which would breach a 1.5x covenant and could trigger an event of default.
For commercial property loans, Debt Service Coverage Ratio (DSCR) is commonly used instead, which covers both interest and capital repayments rather than interest alone.
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