Calculate and interpret interest cover
Measure how many times operating profit covers interest payable, then assess the evidence and limitations.
Exam scope and assessment notes
Cambridge International AS & A Level Accounting 9706, 2026–2028 syllabus, Version 2. Use the ratio formulae in the syllabus appendix exactly; Cambridge states these are the only formulae accepted. Use year-end balances where appropriate unless the question specifies averages, and round to the requested number of decimal places. Practice is self-checked, not an official Cambridge grade. Full timed Papers 1–4 and human subject-teacher review remain outstanding.
Before you begin
- Use the AS Topic 1.6 ratio, financial-statement and stakeholder skills. These lessons add only the A Level ratios and interpretation required by Topic 3.5.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
Operating profit is $150,000 and interest payable is $30,000. What is the ratio?
What you will learn
- Apply profit from operations ÷ interest payable
- Report interest cover in times
- Explain why a low or rising result needs context
Use operating profit, not profit after interest
Interest cover (times) = profit from operations ÷ interest payable. The numerator is before interest expense, so the ratio shows how many times operating profit covers the stated interest payable.
A result of 5 times means operating profit is five times the interest charge in the figures used. If interest payable is zero or not given, the ratio cannot be calculated from this formula; do not divide by zero or invent a value.
Treat coverage as one part of borrowing risk
A lower cover can leave less operating-profit headroom if earnings fall or interest costs rise. A higher cover may indicate more capacity, but a single period does not show cash timing, loan principal repayments, future rates or earnings volatility.
Compare the result over time and alongside gearing and cash-flow information. Recommendations should explain the risk and ask for relevant evidence rather than treating one ratio as a guarantee.
Pause and explain
What does 4 times interest cover mean?
Worked example
Profit from operations is $240,000 and interest payable is $24,000. Calculate interest cover.
Show the worked solution
- Identify profit from operations as the numerator.
- $240,000 ÷ $24,000 = 10.
- Report interest cover as 10 times.
Answer Interest cover is 10 times.
Try a topic test
Choose Easy, Normal or Difficult. Save your answers and open worked review after finishing.
Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
A company reports profit from operations of $315,000 and interest payable of $45,000. Calculate and interpret interest cover.
Give me a hint
Divide the operating profit by the interest charge.
Compare my reasoning
- $315,000 ÷ $45,000 = 7.
- Report the ratio as 7 times.
- It means the stated operating profit is seven times the interest payable for that period; it does not include loan principal.
Interest cover is 7 times. The ratio measures operating-profit coverage of interest only.
Look for these in your work
- Use operating profit as numerator.
- Calculate 7 times, not 7%.
- Explain that it does not measure principal repayment.
Operating profit falls from $400,000 to $320,000 while interest payable stays at $40,000. Calculate both years and the change.
Give me a hint
Calculate each period separately using the same formula.
Compare my reasoning
- Earlier cover = $400,000 ÷ $40,000 = 10 times.
- Current cover = $320,000 ÷ $40,000 = 8 times.
- Cover falls by 2 times, reflecting lower operating-profit headroom against the same interest charge.
Interest cover declines from 10 to 8 times, a 2-times fall.
Look for these in your work
- Calculate each year's cover.
- Find the 2-times decrease.
- Link the fall to operating-profit headroom.
A lender sees cover rise to 9 times after a property sale creates a one-off operating profit. Should the lender conclude that recurring debt capacity improved? Explain.
Give me a hint
Distinguish a one-off item from profit generated by the ongoing business.
Compare my reasoning
- The calculation uses the reported operating profit for the period, including the stated one-off item if classified there.
- A disposal gain may not recur, so the ratio can overstate sustainable coverage.
- Review recurring operating profit, cash flows, interest terms and future performance before changing credit terms.
Not from this ratio alone. Separate the one-off item and assess recurring earnings, cash flow and debt terms before concluding capacity improved.
Look for these in your work
- Recognise the effect of the one-off profit.
- Avoid assuming it will recur.
- Request cash-flow and forward-looking evidence.
Common mistakes
- Using profit for the year after interest
- Multiplying by 100 and reporting a percentage
- Calling high interest cover proof that borrowing is risk-free
What can you explain now?
What is the numerator in the syllabus interest-cover formula?
Compare with the explanation
Profit from operations
Interest cover is profit from operations divided by interest payable.
After trying it yourself, choose your next review. This is your self-assessment.
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Make it stick
Write the interest-cover formula and state what the result does not measure.
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.