Can profit comfortably carry the debt?
How many times over the business's operating profit covers the interest on its borrowing. It shows how much of a fall in profit the business could absorb before debt becomes a problem.
Get a finance reviewInterest cover = Operating profit (EBIT) ÷ Interest payable. Debt service cover = Cash available for debt service ÷ (Interest + Capital repayments)
Interest cover above 3x is generally comfortable; below 1.5x is a warning sign. Lenders commonly look for debt service cover of at least 1.25x.
Operating profit before interest and tax divided by interest payable in the same period. A related measure, debt service cover, compares cash flow with total loan repayments including capital, and is the measure lenders most often test in loan agreements.
Borrowing can fund growth efficiently, but it adds a fixed cost that has to be met whatever happens to trading. Interest cover shows how much headroom there is. When rates rise or profit falls, a business with thin cover can move from comfortable to stretched quickly. Lenders use these ratios to set limits and covenants, so knowing them in advance avoids surprises.
Include all interest-bearing debt: bank loans, overdrafts, asset finance, director loans that carry interest and credit cards. Test it against lower profit and higher interest rates, not just current figures. If you have loan covenants, track the lender's exact definition monthly and forecast it forward, so any risk of breach is spotted early.
Most owner-managed businesses don't, or they work it out in a way that flatters the result. We'll calculate it from your own numbers and show you what it's telling you.
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