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 loan to.
2. It helps in evaluating the emerging risk of a firm that a bank is going to give 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:
Answer:
(a)
Core Books/NCERT
One of the significant and most crucial liquidity ratios is the Interest Coverage Ratio, which indicates the level of a company’s ability to afford the interest that is to be paid by the company for raising debt. It does not measure the ability to make principal payments on the debt; instead it depicts how much the company can afford to pay the interests on the debt promptly. • The interest coverage ratio is used to see how well a firm can pay the interest on outstanding debt. So, statement 1 is correct. • Also called the times-interest-earned ratio, this ratio is used by creditors and prospective lenders to assess the risk of lending capital to a firm. So, statement 2 is correct. • A higher coverage ratio is better, although the ideal ratio may vary by industry. So, statement 3 is not correct. Therefore, the correct answer is (a).