Can You Even Afford Your Debt's Interest? (Interest Coverage Ratio)

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Издатель Jun 4, 2025

Here's what contractors don't check until it's too late: whether they can actually afford their debt or just the interest on it.

Your interest coverage ratio tells you if your business makes enough to pay for the debt you've taken on. Most contractors stack loans without checking this number, then wonder why every hiccup turns into a cash crisis.

What You'll Learn:
✓ The simple EBIT ÷ Interest formula that reveals your debt danger zone
✓ Real benchmarks: What ratios mean you're safe vs. skating on thin ice
✓ Case study: How one "successful" contractor discovered his 1.1 ratio trap
✓ The 4-step blueprint to get your debt under control before it controls you

The Brutal Reality: Below 1.0 means you're not even earning enough to cover interest - forget paying off principal. You're literally losing ground just renting money.

Your Debt Health Check:
Calculate your current interest coverage ratio using last year's numbers
Compare against benchmarks (3.0+ = safe, below 1.5 = danger zone)
Ask yourself: Am I working for my business or just feeding the bank?

Key Insight: Don't confuse this with debt service coverage ratio (DSCR). Interest coverage just asks: can you afford to rent this money? If not, you're living on borrowed time.

Coverage Benchmarks:
Above 3.0: Breathing easy
2.0-2.9: Acceptable but watch it
1.5-1.9: Bank should be nervous (and so should you)
Below 1.5: Skating on thin ice
Below 1.0: Working for the bank, not yourself

More Back of the Napkin Math episodes: https://bit.ly/backofthenapkinmath
Dealing with debt stacking or payment pressure? Drop your situation below - I've helped dozens of contractors get their interest coverage back on track.

Connect:
Website: https://profitfirstconstruction.com
LinkedIn: https://bit.ly/WadeLI