financial-metrics
Interest coverage divides operating earnings by interest expense to show how many times the business can service its debt cost. EBIT/interest is the classic ratio; EBITDA/interest is the looser credit-market variant.
Debt-to-EBITDA is a stock-to-flow leverage ratio. Interest coverage is a flow-to-flow ratio: this year’s operating surplus versus this year’s interest bill.
Textbook (CFA-style):
Interest coverage = EBIT / Interest expense
Credit documents often use:
EBITDA / Cash interest
or a fixed-charge cover that also includes leases and sometimes capex. Higher is safer. Below ~2x EBIT cover, small earnings misses become default stories; LBO models at tight cover depend on rate paths as much as on customers.
Illustration only. Hypothetical manufacturing holdco after a recap.
| Base | Rates +200 bp | EBITDA −15% | |
|---|---|---|---|
| EBIT | €6.0m | €6.0m | €5.1m |
| Cash interest | €2.0m | €2.7m | €2.0m |
| EBIT cover | 3.0x | 2.2x | 2.6x |
| EBITDA | €8.2m | €8.2m | €7.0m |
| EBITDA cover | 4.1x | 3.0x | 3.5x |
The rate shock hits cover harder than a moderate volume shock in this capital structure. That is why coverage and leverage are a pair, not substitutes.
Use EBIT cover when depreciation is real (assets wear out). Use EBITDA cover only if you also inspect CAPEX. Always prefer cash interest to PIK interest if you care about liquidity rather than accounting profit.
Bank credit papers; bond indentures; financial buyer debt capacity; going-concern analysis.
Numerator can be adjusted into meaninglessness. Denominator can exclude commitment fees, ticking fees, and interest on vendor notes. Coverage is backward-looking unless you use a forward covenant definition. Non-cash interest (PIK) can make EBIT cover look fine while cash cover is not.
Dazur stores statutory interest, cash interest and the earnings numerator actually used in the facility agreement. Matching a company to leveraged capital without that triad is guessing.