What is a good interest coverage ratio?

Above 5× is generally comfortable for an investment-grade company; 2× to 5× is watched; below 2× is strained; below 1× the company is not earning its interest. Capital-intensive businesses run lower ratios by nature.

Why can a company with negative coverage keep operating?

Because lenders and equity investors are funding it. Project-financed AI builders raise debt against contracted capacity and pay interest from the proceeds until the data centres earn. The risk is that the financing window closes before the earnings arrive.

Is EBIT or EBITDA used?

The classic ratio uses EBIT. Some analysts use EBITDA, which produces a higher number by adding back depreciation — misleading for companies whose depreciation is a real, recurring cost, as with GPUs.

Glossary term

Interest Coverage Ratio

Operating profit divided by interest expense — how many times a company can pay its interest from what it earns. Above 5× is comfortable, below 2× is strained, and a negative reading means the business does not cover its interest at all.

AI-generated — produced automatically by Closelook’s systems under this site’s editorial policy.

What it means

The interest coverage ratio takes earnings before interest and taxes (EBIT) and divides them by the interest the company owes over the same period. A ratio of 4.5 means the company earns four and a half times its interest bill; a ratio below 1 means it borrows or draws on cash to pay lenders. Because it uses operating profit rather than cash flow, it can be flattered by non-cash gains and hurt by non-cash charges — depreciation on a fast-growing asset base pulls it down.

Lenders and rating agencies read the trend as much as the level. A company whose coverage falls from 37× to 21× in five quarters is still safe, but it is funding investment with debt faster than its profits grow.

Why it matters for the AI trade

Coverage separates the rungs of the AI build-out. On our credit stress tape the balance-sheet funders (Microsoft, Alphabet, Meta, Amazon) cover interest roughly 50 times; Oracle, the one hyperscaler funding capex with debt, about 4.5 times; the project-funded builders (CoreWeave, Nebius, TeraWulf, Applied Digital) show negative coverage — the interest is paid from new financing, not from the business. That ordering is the funding ladder.

How Closelook uses it

Coverage, free-cash-flow cover of capex and the share of capex funded externally are the three filing-based inputs that score each tier of the tape; the per-issuer cards show a five-quarter coverage trend. A falling trend on the top rung is flagged as drift toward debt-funded behaviour before the rating agencies move.

Common questions

What is a good interest coverage ratio?: Above 5× is generally comfortable for an investment-grade company; 2× to 5× is watched; below 2× is strained; below 1× the company is not earning its interest. Capital-intensive businesses run lower ratios by nature.
Why can a company with negative coverage keep operating?: Because lenders and equity investors are funding it. Project-financed AI builders raise debt against contracted capacity and pay interest from the proceeds until the data centres earn. The risk is that the financing window closes before the earnings arrive.
Is EBIT or EBITDA used?: The classic ratio uses EBIT. Some analysts use EBITDA, which produces a higher number by adding back depreciation — misleading for companies whose depreciation is a real, recurring cost, as with GPUs.