Coverage answers the question leverage ratios dodge: can the company service the debt from operations today? Below about 2 times, a modest earnings decline turns into a covenant breach; above 6 times, the debt is largely irrelevant to the equity story.
Variants use ebitda instead of operating-income, or subtract capex to get a fixed-charge coverage that includes rent and maintenance spending. Lenders write covenant tests against whichever they prefer.
Example: Northwind Tools has $120M of EBIT and $18M of interest, coverage of 6.7 times. On an EBITDA basis it is 10.8 times. Refinancing the 2032 notes at 7.5% would cut EBIT coverage to 5.1 times.
Related: interest-expense, net-debt-to-ebitda, covenant, refinancing-risk, operating-income