Skip to content

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

Which of the following ratios is classified as a coverage ratio?

Interest coverage ratio is a coverage ratio because it shows how many times operating profit (EBIT) covers interest obligations. The others belong to different groups: debtors turnover is an activity ratio, gross profit ratio is a profitability ratio, and proprietary ratio is a solvency ratio.

  1. ADebtors turnover ratio
  2. BInterest coverage ratioCorrect
  3. CGross profit ratio
  4. DProprietary ratio

Explanation

Coverage ratios measure the ability of a firm to service fixed obligations such as interest, preference dividend and debt instalments. Interest coverage ratio (EBIT/Interest) does this. Debtors turnover is an activity ratio, gross profit ratio is a profitability ratio and proprietary ratio is a solvency (capital structure) ratio.

Did you get it right without looking?

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

Practise Financial Analysis and Planning - Ratio AnalysisFree diagnostic mock

More Financial Analysis and Planning - Ratio Analysis questions