Interest Cover measures how comfortably a company can meet its interest obligations from its operating profits. It is commonly calculated as earnings before interest and tax divided by interest expense. The higher the ratio, the greater the “buffer” the company has before profits would become insufficient to pay interest. This makes it a key credit and solvency indicator, especially for companies with meaningful borrowing. A low or falling interest cover can be a warning sign that the firm may struggle to service interest payments if trading conditions weaken, which can increase default risk and restrict strategic flexibility. The ratio does not directly tell you the interest rate the company is paying, because interest expense depends on both the rate and the amount and type of debt. It is also not the same as gearing or leverage metrics such as debt-to-equity, which compare financing structure rather than payment capacity. Finally, it does not measure liquidity for dividends; cash-based measures and free cash flow analysis are more relevant for dividend capacity. In exam terms, interest cover is primarily about the ability to service interest costs from profits.