CA Intermediate · Financial Management and Strategic Management · Financial Analysis and Planning - Ratio Analysis
Which of the following ratios is classified as a coverage ratio that measures a firm's ability to meet its fixed interest obligations from operating profit?
The interest coverage ratio is the coverage ratio that measures ability to pay interest. It is calculated as EBIT divided by interest expense, showing how many times operating profit covers interest. The other options relate to capital structure, receivable efficiency or market valuation.
- AInterest coverage ratioCorrect
- BProprietary ratio
- CDebtors turnover ratio
- DEarnings yield
Explanation
Interest coverage ratio = EBIT / interest, showing how many times interest is covered by operating profit. Proprietary ratio is a capital structure ratio, debtors turnover is an activity ratio, and earnings yield is a market measure.
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