Interest coverage measures a company's ability to handle debt service, i.e. the degree of protection creditors have from a default on interest payment.

EBIT / [Interest expense + Dividends on preferred stock]

Gearing measures, such as Total debt/Total equity, have to be analysed together with Interest coverage in order to get a clear picture of a company's debt-related risk.

For example, a company showing a strong and recurring operating margin can cope with a higher level of debt than a company operating in a highly cyclical business with low margins.

The nature of the business and the management efficiency directly impact the EBIT number while the level of debt, reflecting financial policy and interest rates, affects the amount of interest expense.