Skip to content

NISM Certifications · NISM-Series-XV: Research Analyst · Company Analysis - Financial Analysis

Company X reports profit before interest and tax (EBIT) of Rs 120 crore. Interest expense is Rs 30 crore, and the firm has Rs 20 crore of non-cash depreciation included in costs. Debt of Rs 300 crore carries that interest. Preference dividend is nil. Which statement is correct about its interest coverage ratio and its change if EBIT falls 25%?

Coverage is 4 times now, falling to 3 times. Interest coverage is EBIT divided by interest: 120/30 = 4. A 25% fall in EBIT gives 90, and 90/30 = 3. Depreciation is not added back in the standard ratio.

  1. ACoverage is 4 times now and falls to 3 timesCorrect
  2. BCoverage is 5 times now and falls to 3.75 times
  3. CCoverage is 4 times now and falls to 2 times
  4. DCoverage is 3 times now and falls to 2.25 times

Explanation

Interest coverage = EBIT/interest = 120/30 = 4 times. After a 25% fall, EBIT = 90, and coverage = 90/30 = 3 times. Adding depreciation back (140/30 = 4.67) is not the standard EBIT-based ratio. The 2 times option wrongly halves the ratio for a 25% fall.

Did you get it right without looking?

One question tells you little. A timed set on Company Analysis - Financial Analysis shows your real accuracy, how long you take and where you lose marks.

Practise Company Analysis - Financial AnalysisFree diagnostic mock

More Company Analysis - Financial Analysis questions