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CMA Final · Strategic Performance Management and Business Valuation · Corporate Failure

A company shows EBIT of ₹6 crore, interest expense of ₹4 crore, and operating cash flow of ₹1 crore against current debt maturing of ₹5 crore. Which interpretation best signals early financial distress?

Interest cover is 1.5 times (6/4), a thin buffer, and operating cash flow of ₹1 crore meets just a fifth of the ₹5 crore debt falling due. Together these indicate liquidity stress and early distress risk, even though EBIT still covers interest.

  1. AInterest cover of 1.5 times with operating cash flow insufficient to meet maturing debtCorrect
  2. BInterest cover of 1.5 times, which is comfortably above the usual benchmark of 3
  3. CInterest cover of 0.67 times, so EBIT cannot pay interest
  4. DInterest cover of 2.5 times with cash flow fully covering debt

Explanation

Interest cover = 6/4 = 1.5 times, thin margin of safety. Operating cash flow of ₹1 crore covers only 20% of the ₹5 crore maturing debt. Cover of 0.67 comes from inverting the ratio, and 1.5 is not above 3.

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