The ratio establishes the relationship between profit before interest and tax and fixed interest charges are the interest cover ratio.

Interest cover ratio = N/P (before interest & tax)/Fixed interest charge

• The interest coverage ratio indicates the number of times interest is covered by the profits available to pay the interest charges.
• Long-term creditors of the firm are interested in knowing the firm's ability to pay interest on their long-term borrowing.
• Generally, the higher the ratio, the safer the long-term creditors because even if the earnings of a firm fall, the firm shall be able to meet its commitment of fixed interest charges.
• But a too-high interest coverage ratio may not be good for the firm because it may imply that firm is not using debt as a source of finance so as to increase the earnings per share.