CA Intermediate · Financial Management and Strategic Management · Financial Analysis and Planning - Ratio Analysis
Ishaan Ltd has EBIT of ₹6,00,000 and interest on debentures of ₹1,50,000. What is its Interest Coverage Ratio?
The interest coverage ratio is 4 times, found by dividing EBIT of ₹6,00,000 by interest of ₹1,50,000. The numerator must be earnings before interest and tax, not earnings after interest, so 3 times is incorrect.
- A4 timesCorrect
- B3 times
- C5 times
- D2.5 times
Explanation
Interest coverage = EBIT / interest = 6,00,000 / 1,50,000 = 4 times. Using EBIT minus interest (4,50,000) as numerator gives 3 times, which is wrong because the ratio uses earnings before interest.
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