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:

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CollectorBabu · Accepted Answer

Correct Answer: 1 and 2 only. It indicates the ability of a firm to service the debt and repay it over the tenure of the loan. It basically identifies how many times earnings can pay the interest required by existing debt. The ratio is calculated by dividing a company’s earnings before interest and taxes by the company’s interest expenses for a given period. It is one of the parameters that help understand and evaluate present and emerging risks of a firm a bank is lending to. An analysis of ICR, among other parameters, helps the banks assess the borrowers’ financial strength and ability to service a loan. ICR is one of the important factors that indicate the possibility of stress in a bank’s loan book and the ability of the borrower to repay a loan. Hence statement 1 and 2 are correct. The higher the level of ICR (in terms of a numeric) the better is the ability of a borrower to service its debt where as declining ICR is often something for investors to be wary of, as it indicates that a company may be unable to pay its debts in the future. Hence statement 3 is incorrect.

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