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CA Intermediate · Financial Management and Strategic Management · Financial Analysis and Planning - Ratio Analysis

Which of the following ratios is calculated by dividing Profit before Interest and Tax (PBIT) by Interest on long-term debt (fixed interest charges)?

The ratio of PBIT to interest on long-term debt is the interest coverage ratio. It shows how many times a firm's operating profit covers its interest obligation. Debt service coverage ratio differs because it also brings in principal repayment instalments and uses earnings available for debt service.

  1. ADebt service coverage ratio
  2. BInterest coverage ratioCorrect
  3. CProprietary ratio
  4. DCapital gearing ratio

Explanation

Interest coverage ratio = EBIT / Interest expense. It shows how many times the interest burden is covered by operating earnings. Debt service coverage ratio is different, as it includes principal repayments and uses earnings available for debt service.

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