Interest coverage ratio (TIE)

Interest coverage ratio (TIE, times-interest-earned) equals EBIT divided by gross interest expense. Investment-grade issuers typically run above 6x; below 2x is distress territory[Damodaran].

The formula

Interest coverage = EBIT / Interest expense

Use trailing-twelve-month EBIT and trailing-twelve-month gross interest expense. Some covenant tests use EBITDA instead of EBIT in the numerator; check the credit agreement.

Synthetic-rating thresholds

Damodaran's synthetic-rating table for non-financial large-cap firms:

CoverageSynthetic rating
> 8.5xAAA
6.5 - 8.5xAA
5.5 - 6.5xA+
4.25 - 5.5xA
3.0 - 4.25xBBB
2.5 - 3.0xBB+
2.0 - 2.5xBB
1.75 - 2.0xB+
< 1.75xB or below

When EBIT cannot cover interest

Coverage below 1.0 means operating profit is insufficient to service the interest bill, before any consideration of principal repayment, capex, or tax. Distress.

See interest expense line-item page for sourcing.