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

Company X reports profit before interest and tax (EBIT) of Rs 360 crore, interest expense of Rs 90 crore and tax rate of 25%. Preference dividend is nil. Total debt is Rs 900 crore and equity is Rs 1,800 crore. Which statement is correct?

Interest coverage is 4 times and debt-to-equity is 0.50. EBIT of Rs 360 crore divided by interest of Rs 90 crore gives 4, while debt of Rs 900 crore over equity of Rs 1,800 crore gives 0.50.

  1. AInterest coverage is 4 times and debt-to-equity is 0.50Correct
  2. BInterest coverage is 3 times and debt-to-equity is 0.50
  3. CInterest coverage is 4 times and debt-to-equity is 2.00
  4. DInterest coverage is 3 times and debt-to-equity is 2.00

Explanation

Interest coverage = EBIT/interest = 360/90 = 4 times. Debt-to-equity = 900/1800 = 0.50. Using post-tax profit (270/90 = 3) is a wrong numerator, and inverting the leverage ratio gives 2.00.

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