What Is an Interest Coverage Ratio (ICR)?

By Matthew Frankel, CFP – Updated Apr 17, 2025 at 12:09 AM EST

Key Points

ICR measures if a company can cover its debt interest; calculate by dividing EBIT by interest expense.
An ICR under 1.0 signals financial trouble; analysts prefer a minimum ICR of 2.0.
For investing, compare ICRs of companies, like Royal Caribbean's 2.24 vs Norwegian's 1.2.

When analyzing stocks to invest in, getting a feel for the business's financial health and strength is important. One smart way to do it is with debt metrics, including the interest coverage ratio, or ICR. Unlike some popular debt metrics, such as debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortization), the ICR takes the actual interest expense into consideration. Here's how it works.

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A bear trap with an attached weighted ball that has the word Debt engraved on it. — Image source: Getty Images.

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On the other hand, competing cruise operator Norwegian had $931 million in operating income in 2023 and spent $775 million on interest expense. Dividing these shows an ICR of 1.2, significantly lower than Royal Caribbean.

To be sure, the interest coverage ratio is just one piece of the puzzle when analyzing a company's financial health and should be used in combination with other metrics. However, it is an important financial health metric to keep in your analytical toolkit.

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About the Author

Matt Frankel, CFP, is a contributing Motley Fool stock market analyst specializing in the real estate and financial sectors. Prior to The Motley Fool, Matt taught high school and college mathematics. He holds a bachelor’s degree in physics from the University of South Carolina, a master’s degree in mathematics from Nova Southeastern University, and a graduate certificate in financial planning from Florida State University. He won a SABEW award for coverage of the 2017 Tax Cuts and Jobs Act. He is also regularly interviewed by Cheddar, Globe St, The National Desk, and other TV networks and publications for his real estate, financial, stock market, and investing expertise.

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Matt Frankel has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.