[Solved] What is the importance of the term “Interest Coverage Ratio” of a firm in India? 1. It helps in understanding the present risk of a firm that a bank is going to give a loan to. 2. It helps in evaluating the emerging risk of a firm that a bank is going to give loan to. 3. The higher a borrowing firm’s level of Interest Coverage Ratio, the worse is its ability to service its debt.

Q72. What is the importance of the term “Interest Coverage Ratio” of a firm in India?

1. It helps in understanding the present risk of a firm that a bank is going to give a loan to.

2. It helps in evaluating the emerging risk of a firm that a bank is going to give loan to.

3. The higher a borrowing firm’s level of Interest Coverage Ratio, the worse is its ability to service its debt.

Select the correct answer using the code given below:

A. 1 and 2 only

B. 2 only

C. 1 and 3 only

D. 1, 2 and 3

Answer: A

• The interest coverage ratio is a debt and profitability ratio used to determine how easily a company can pay interest on its outstanding debt.

• The interest coverage ratio is calculated by dividing a company’s

earnings before interest and taxes (EBIT) by its interest expense during a given period.

• The interest coverage ratio is sometimes called the times interest earned (TIE) ratio. Lenders, investors, and creditors often use this formula to determine a company’s riskiness relative to its current debt or for future borrowing.

• Generally, a higher coverage ratio is better, although the ideal ratio may vary by industry.