UPSC Prelims 2020 Question:

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.

Explanation:

• The Interest Coverage Ratio measures a company’s ability to meet required interest expense payments related to its outstanding debt obligations on time. It helps in measuring the present and future risk involved in granting a loan by a bank to a firm. So, statements 1 and 2 are correct.
• The interest coverage ratio is calculated by dividing a company's earnings before interest and taxes (EBIT) by its interest expense during a given period. The higher the Interest Coverage Ratio, the better will be the company’s ability to repay the borrowed funds and interest payments. So, statement 3 is not correct.
  
  

Therefore, option (1) is the correct answer.

Subject: Economics | Financial Sectors and Capital Market