Operating earnings divided by interest expense — measures how many times over a company can cover its interest payments from operating profits.
Deeper Explanation
Graham required a minimum interest coverage of 5x for industrial companies and 3x for utilities. A coverage ratio below 2x signals financial stress — the company is using most of its operating profits just to service debt, leaving nothing for investment, dividends, or a margin for error. Coverage ratios collapse during earnings downturns, which is exactly when creditors demand repayment. Analysing interest coverage across economic cycles (not just peak earnings) reveals which balance sheets are structurally sound and which are only sound in good times.
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