What is the importance of the term “Interest Coverage Ratio” of a firm in India?1. It helps in understanding the present risk of a firm that a bank is going to give a loan to.2. It helps in evaluating the emerging risk of a firm that a bank is going to give a loan to.3. The higher a borrowing firm’s level of Interest Coverage Ratio, the worse is its ability to service its debt.Select the correct answer using the code given below.
✓ Correct answer: a) 1 and 2 only
ExplanationInterest Coverage Ratio is a financial metric used to assess a company’s ability to meet its interest obligations on its debt.It’s calculated as: Interest Coverage Ratio = Earnings Before Interest and Taxes (EBIT) / Interest Expense Statements 1 and 2 are correct : The interest coverage ratio is a debt and profitability ratio used to determine how easily a company can pay interest on its outstanding debt.Banks use the ICR to assess the current financial health of a firm.A low ICR suggests the firm may face difficulties repaying interest on its loans, posing a higher risk to lenders.ICR trends can help banks foresee emerging risks.A declining ICR signals worsening financial health, hinting at future repayment challenges.Statement 3 is incorrect : A higher ICR implies that the firm generates sufficient earnings to cover its interest expenses comfortably, which is favorable.Conversely, a low ICR indi- cates a firm’s weakened ability to service its debt.155
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