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

Which of the following ratios is classified as a coverage ratio and shows how many times a firm's operating profit can meet its interest obligation on borrowed funds?

The interest coverage ratio is the coverage ratio that shows how many times operating profit (EBIT) covers interest on borrowings. Debt-equity and proprietary ratios measure capital structure from the balance sheet, while fixed asset turnover measures asset efficiency, so none of them test interest-paying capacity.

  1. ADebt-equity ratio
  2. BInterest coverage ratioCorrect
  3. CProprietary ratio
  4. DFixed asset turnover ratio

Explanation

Interest coverage ratio is EBIT divided by interest charges, so it shows how many times profit before interest and tax covers interest. Debt-equity and proprietary ratios are capital structure (solvency) ratios based on balance sheet figures, and fixed asset turnover is an activity ratio.

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