NISM Certifications · NISM-Series-XV: Research Analyst · Company Analysis - Financial Analysis
Rohan Foods reports operating profit (EBIT) of Rs 120 crore, interest expense of Rs 30 crore, and tax rate of 25%. Its debt is Rs 300 crore and equity is Rs 500 crore. What is the interest coverage ratio?
Interest coverage is 4.0 times, found by dividing EBIT of Rs 120 crore by interest expense of Rs 30 crore. Tax and the debt and equity figures do not enter the calculation. Using profit after interest as the numerator would wrongly give 3.0 times.
- A3.0 times
- B4.0 timesCorrect
- C5.33 times
- D2.67 times
Explanation
Interest coverage = EBIT / interest = 120/30 = 4.0 times. Tax rate and capital figures are irrelevant. 3.0 would result from subtracting interest from EBIT before dividing (90/30), a wrong numerator.
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