CA Intermediate · Financial Management and Strategic Management · Financial Analysis and Planning - Ratio Analysis
A firm has EBIT of ₹9,00,000 and interest expense of ₹1,50,000 on its debentures. What is its interest coverage ratio?
The interest coverage ratio is 6 times. It is computed as EBIT divided by interest, so ₹9,00,000 divided by ₹1,50,000 equals 6. EBIT should not be reduced by interest before dividing, which is the mistake that produces the 5 times figure.
- A6 timesCorrect
- B7.5 times
- C5 times
- D1.5 times
Explanation
Interest coverage ratio = EBIT ÷ interest = 9,00,000 ÷ 1,50,000 = 6 times. Check: 6 × 1,50,000 = 9,00,000. Using EBIT less interest (7,50,000) ÷ 1,50,000 gives 5 times, which is wrong because EBIT is not reduced by interest.
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