The Interest Coverage Ratio (ICR) has always been a favourite tool for financial analysts, but in 2025’s rapidly changing Australian landscape, it’s more than just a number. Whether you’re a retail investor sizing up ASX-listed stocks, a business owner pitching to lenders, or a curious saver watching the RBA’s every move, understanding this ratio can help you navigate risk and opportunity.
Why the Interest Coverage Ratio is Front and Centre in 2025
With the Reserve Bank of Australia keeping a hawkish eye on inflation, and corporate debt levels under scrutiny after years of pandemic-era borrowing, the ability of companies to meet their interest obligations is in the spotlight. The ICR, which measures a company’s earnings before interest and tax (EBIT) against its interest expenses, is a key metric for assessing financial resilience.
- RBA Cash Rate Movements: The RBA’s rate hikes in late 2024 and early 2025 have pushed corporate borrowing costs to their highest levels since 2012, squeezing companies with thin profit margins.
- Policy Shifts: The Australian Prudential Regulation Authority (APRA) has updated its lending guidelines, requiring more rigorous stress-testing of business loan applicants’ ICRs, with many banks now demanding a minimum ratio of 2.5 for new commercial loans.
- Sector Hotspots: Property developers and retail businesses, especially those exposed to variable-rate debt, have seen their ICRs deteriorate sharply. On the flip side, resource companies with strong earnings and manageable debt are weathering the storm.
How to Calculate and Interpret the ICR (with Real-World Examples)
The formula is simple: ICR = EBIT / Interest Expense. But the implications are anything but basic. Here’s how it plays out:
- If a company’s ICR is 1.0, its earnings just cover its interest bill—leaving no buffer for downturns, let alone growth.
- An ICR above 3.0 is generally considered healthy, but in capital-intensive sectors like mining, even higher ratios may be expected.
- In 2025, ASX-listed retail chains like Myer and JB Hi-Fi reported ICRs of 4.2 and 7.1 respectively in their latest half-year results, signalling robust ability to manage debt even as rates rose.
- Contrast this with some property trusts, where ICRs have slipped below 2.0 due to falling commercial rents and higher funding costs—raising red flags for dividend sustainability and refinancing risk.
Tip for Investors: Always compare ICRs across similar industries, and track trends over time. A declining ratio can be an early warning sign, especially if paired with rising interest rates or shrinking profits.
ICR in Lending, Credit Ratings, and Investment Decisions
Beyond the boardroom, the ICR is increasingly used by banks, credit agencies, and even retail investors to assess risk.
- Banks: In 2025, major Australian lenders have tightened their lending standards, often declining business loan applications with ICRs below 2.0 unless significant collateral is offered. This has affected SMEs in hospitality and construction the most.
- Credit Ratings: Agencies like S&P Global and Moody’s use ICR thresholds when evaluating companies’ creditworthiness. A falling ICR can lead to a downgrade, increasing borrowing costs and impacting share prices.
- Investors: Fund managers are screening for companies with stable or improving ICRs, especially in a climate where debt refinancing is getting pricier. Some have trimmed exposure to sectors with chronic ICR stress, such as discretionary retail and office real estate trusts.
It’s also worth noting the impact of ICR on dividend policy: Companies with high debt and a weak ICR may cut dividends to preserve cash, disappointing income-focused investors.
Conclusion: The ICR as a Compass in Uncertain Times
The Interest Coverage Ratio is no longer just an accounting footnote—it’s a frontline measure of financial health in 2025. With higher rates, cautious lenders, and a growing focus on corporate resilience, investors and business owners alike should keep a close eye on this metric. It won’t tell you everything, but in today’s market, ignoring it could prove costly.
