Civil Services Examination · Question 62
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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Answer: (A) 1 and 2 only
Explanation
ICR = EBIT / interest expense; it shows both current and emerging repayment risk. A higher ICR means a better, not worse, ability to service debt.