Interest Coverage Ratio: Can This Company Pay Its Debt Interest From Its Own Profit?
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5 min read
Two companies each earn Rp120 billion from their main business this year. Each owes Rp600 billion in debt. On paper they look the same.
Then Bank Indonesia raises its rate. One company's interest bill jumps. The other's does not move. Why?
The answer starts with a simple number called the interest coverage ratio. This post explains it in plain words, works through an example, and shows how a higher BI-Rate can squeeze a company with floating-rate debt. It does not say any stock is a good or bad buy.
The interest coverage ratio (ICR) answers one question. How many times can a company's operating profit pay its interest bill?
Operating profit here means EBIT. That stands for earnings before interest and taxes. It is what the business earns from its real work, before it pays lenders and before it pays tax.
Finance guides use this same formula. Some call the ratio "times interest earned" (Stockbit Snips, Pintu).
If EBIT is Rp200 million and interest is Rp100 million, the ratio is 2. The company covers its interest two times over.
We will use two invented companies. They are not real issuers. All numbers are NetWort arithmetic, in rupiah billions.
| Line | PT Contoh A | PT Contoh B |
|---|---|---|
| Sales | 1,000 | 1,000 |
| Operating costs | −880 | −880 |
| EBIT | 120 | 120 |
| Debt | 600 | 600 |
| Interest rate on the debt | 9% | 9% |
| Interest expense | 54 | 54 |
| Interest coverage ratio | 2.2x | 2.2x |
Both companies cover their interest about 2.2 times. EBIT of 120 divided by interest of 54 gives 2.22.
The difference is how the debt is set up. PT Contoh A has floating-rate debt. Its rate moves with market rates. PT Contoh B has fixed-rate debt. Its rate is locked for the life of the loan.
The BI-Rate is Bank Indonesia's policy interest rate. Bank loan rates tend to follow it, though not at once. Our post on why bank loan rates follow the BI-Rate slowly explains the delay.
Bank Indonesia held the BI-Rate at 5.75% at its 22 to 23 September 2026 meeting. It had raised the rate by 100 basis points (one percentage point) over two months earlier in the year, and has held since June (Kontan, seen through search on 12 October 2026). We could not open the page itself, so check bi.go.id for the official figure.
Now let us say loan rates rise for PT Contoh A. Fixed-rate PT Contoh B feels nothing.
| Rate on the debt | PT Contoh A interest | PT Contoh A ratio | PT Contoh B ratio |
|---|---|---|---|
| 9% (today) | 54 | 2.22x | 2.22x |
| 10% (+1 point) | 60 | 2.00x | 2.22x |
| 11% (+2 points) | 66 | 1.82x | 2.22x |
| 12% (+3 points) | 72 | 1.67x | 2.22x |
At +3 points, PT Contoh A pays a third more interest, and its ratio drops from 2.22x to 1.67x. EBIT stayed at 120 here. Real life is rarely that kind.
Rates rarely rise when business is booming for everyone. A slow economy can cut EBIT at the same time.
Say PT Contoh A also sees EBIT fall 30%, from 120 to 84. With the rate at 11%, interest is 66.
84 ÷ 66 = 1.27x.
A company that looked comfortable at 2.2x now has a thin cushion. This is the main reason lenders watch the ratio. Falling profit and rising interest squeeze the ratio from both sides.
There is no official cut-off. These are common rules of thumb from finance guides, not laws:
One guide gives 2x as "good enough" instead. Standards also differ by industry (FreshBooks, Stockbit Snips). A utility with steady income can carry a lower ratio than a miner whose profit swings with commodity prices.
Below 1x, EBIT is smaller than interest. The company must use savings, sell assets or borrow more to pay lenders.
The ratio is a quick check, not a verdict. Keep these limits in mind:
Then check the rate backdrop on the NetWort macro page, which tracks the BI rate and other yardsticks.
Open the Explore screener and pick two IDX companies from a debt-heavy sector. Open each latest report, work out the interest coverage ratio, and compare. Then ask which one would feel a higher BI-Rate sooner.