In the ever-evolving world of Australian business finance, one metric consistently stands out for lenders, investors, and CFOs alike: the EBITDA-to-interest coverage ratio. As economic conditions shift in 2025—with rising interest rates, tighter credit, and increased scrutiny from regulators—understanding this ratio isn’t just smart. It’s essential.
What Is the EBITDA-to-Interest Coverage Ratio?
The EBITDA-to-interest coverage ratio measures how easily a company can pay interest on its outstanding debt using its operating earnings. EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortisation—a figure that strips away non-cash and non-operating factors to reveal a business’s true cash-generating power.
Formula:
EBITDA-to-Interest Coverage Ratio = EBITDA / Interest Expense
For example, if an ASX-listed retailer reports an EBITDA of $12 million and pays $2 million in annual interest, its coverage ratio is 6. That means it earns six times what it needs to service debt interest—comfortably above the typical lender minimum of 2–3.
Why This Ratio Matters in 2025
Australian businesses are navigating a new landscape in 2025. The Reserve Bank of Australia’s official cash rate climbed to 4.6% in late 2024, pushing up borrowing costs for both corporates and SMEs. Bank lending standards have also tightened, partly in response to regulatory pressure to reduce risky exposures.
- For business owners: A healthy EBITDA-to-interest coverage ratio signals resilience to creditors and investors. It can mean the difference between securing growth funding or facing a costly refinancing.
- For investors: The ratio offers a quick snapshot of a company’s debt risk. Low or declining ratios may flag potential trouble ahead—especially if economic growth slows.
- For lenders: Banks and alternative financiers often require minimum coverage ratios as a loan covenant. Falling below the threshold can trigger higher interest, extra fees, or even default.
In Q1 2025, major banks like CBA and NAB have publicly updated their lending policies, now scrutinising coverage ratios more closely for commercial and property loans. Businesses with ratios under 2.5 are finding credit harder to access, especially in sectors exposed to retail or construction downturns.
How to Use and Improve the Ratio
Knowing your EBITDA-to-interest coverage ratio isn’t just a reporting requirement—it’s a tool for proactive financial management. Here’s how savvy Aussie businesses are putting it to work:
- Scenario Planning: CFOs run forecasts to see how rising rates or falling sales would impact coverage. For instance, a 1% increase in floating loan rates could halve a marginal company’s ratio overnight.
- Operational Tweaks: Improving EBITDA—through cost control or margin growth—has an outsized impact. Every dollar saved or earned strengthens the buffer for debt servicing.
- Refinancing Strategies: Businesses with strong ratios are negotiating better loan terms in 2025’s competitive finance market. Some are locking in fixed rates before further RBA moves.
Real-world example: In early 2025, a Sydney-based logistics group boosted its coverage from 2.8 to 4.1 by streamlining its fleet operations and renegotiating supplier contracts. This not only satisfied its bank’s revised covenant, but also reduced its overall borrowing rate by 0.4% on renewal.
Limitations and Red Flags
While the EBITDA-to-interest coverage ratio is powerful, it’s not the whole story. It ignores principal repayments, capital expenditure needs, and doesn’t account for one-off gains or losses. In highly leveraged sectors like mining or real estate, even a high ratio can mask looming liquidity issues if cash flow is volatile or capital-intensive projects are underway.
Red flags to watch in 2025:
- Declining ratios across consecutive quarters
- Heavy reliance on short-term debt or variable rates
- EBITDA boosted by one-off asset sales or accounting adjustments
Lenders and investors in 2025 are increasingly pairing this ratio with free cash flow and net debt metrics for a more complete risk picture.
Conclusion
The EBITDA-to-interest coverage ratio remains a frontline metric for anyone serious about financial health in the current Australian business landscape. With higher interest rates and tighter lending criteria, understanding and actively managing this ratio is critical—whether you’re pitching to investors, negotiating with banks, or simply safeguarding your company’s future.
