Every bull market papers over cracks. When capital is cheap and rates are low, the debt-laden and the disciplined march in lockstep. But let the cost of borrowing tick up, and suddenly the strong and the fragile part ways—often with little warning, and always with consequence.

Enter the Interest Coverage Ratio: the most honest number on a company’s financial statement when the party ends. It’s the canary in the coal mine, telling you who can pay the rent—and who’s about to default on dinner.

Interest Coverage: The “Do Not Disturb” Sign for Debt Stress

Interest coverage is simple to calculate—Earnings Before Interest and Taxes (EBIT) divided by interest expense—but in a rising rate cycle, its implications are anything but simple. It tells you, in no uncertain terms, how many times a company can cover its interest payments from operating profits. The higher, the safer. The lower, the closer to the edge.

But there’s a twist: Not all sectors play by the same rules.

Industrials: The Leverage Lovers’ Litmus Test

In the industrials sector, debt has long been fuel for growth. Airlines, machinery makers, and logistics giants borrow to build, expand, and outcompete. When rates are low, leverage is a lever. When rates rise, it morphs into a trapdoor. Companies with wafer-thin interest coverage—think ratios below 3x—face a chilling equation: refinancing risk + profit pressure = vulnerability. The survivors? Those with fortress-like coverage, who can outlast the storm while others scramble for lifelines.

Real Estate: When Debt Becomes the Landlord

Real estate is the textbook case of debt-driven returns. REITs and property developers gorge on leverage to amplify yields. But as rates rise, rent growth rarely keeps pace with interest expense. The interest coverage ratio becomes a spotlight on those who borrowed with discipline—and a siren for those who chased yield with abandon. Watch for the cracks: coverage ratios below 2x often spell distress, especially when refinancing windows slam shut.

Consumer Discretionary: When Spending Slows, Interest Bites

The consumer discretionary sector is where interest coverage meets volatility. Retailers, automakers, and travel companies may appear healthy in boom times, but as borrowing costs climb and consumer wallets tighten, the margin of safety shrinks. Here, interest coverage is not just about debt loads, but about adaptability—who can pivot, cut costs, and preserve earnings as the tide turns?

Energy: A Game of Cycles and Spreads

Energy companies, from oil majors to utilities, have always danced with debt. But their interest coverage fortunes rise and fall with commodity cycles. In an era of rising rates and volatile prices, only those with robust coverage (often 5x or higher) can weather the double whammy of falling revenues and rising interest expense. The rest? They become acquisition targets or, worse, restructuring candidates.

Table: How Sectors Stack Up When Rates Rise

False Comforts and Hidden Dangers: Why Averages Lie

It’s tempting to rely on sector averages, but danger lurks in the details. Some companies mask weak coverage with “adjusted” earnings, others refinance short-term to delay the inevitable. In sectors with wide dispersion—like industrials and consumer discretionary—a single number never tells the full story. Dig deeper. Who’s rolling over debt soon? Who’s locked in low rates, and who’s exposed to floating-rate pain?

Portfolio Survivors: The Anatomy of Staying Power

When the cycle turns, interest coverage separates the resilient from the reckless. Survivors share common traits: prudent debt management, stable cash flows, and the agility to adapt when conditions change. The rest? They become footnotes in the next downturn’s cautionary tales.

In a world where rates are no longer sleeping giants, the interest coverage ratio is your portfolio’s early warning system. Ignore it, and you may find that survival is not about growth—but about staying power.