The following information is given for two firms. Neither firm has pr…

The following information is given for two firms. Neither firm has preference shares or other non-cash expenses.

(Rs. in lakh)	Firm P	Firm Q
EBIT	35	24
Interest	5	4
Profit after tax	21	14
Depreciation	4	2
Repayment obligation	15	4

Which of the following is correct about their interest coverage ratio (ICR) and debt service coverage ratio (DSCR)?

Answer & explanation

Correct answer: option 4

The correct answer is Option (4) → P has the higher ICR, but Q has the higher DSCR.

Given (Rs. in lakh):

Firm P: EBIT 35; Interest 5; Profit after tax 21; Depreciation 4; Repayment 15

Firm Q: EBIT 24; Interest 4; Profit after tax 14; Depreciation 2; Repayment 4

ICR = EBIT ÷ Interest

DSCR = (Profit after tax + Depreciation + Interest) ÷ (Interest + Repayment obligation)

Firm P:

ICR = 35 ÷ 5 = 7

Cash available = 21 + 4 + 5 = 30

Cash needed = 5 + 15 = 20

DSCR = 30 ÷ 20 = 1.5

Firm Q:

ICR = 24 ÷ 4 = 6

Cash available = 14 + 2 + 4 = 20

Cash needed = 4 + 4 = 8

DSCR = 20 ÷ 8 = 2.5

So P has the higher ICR (7 against 6), but Q has the higher DSCR (2.5 against 1.5).

P’s large repayment of Rs. 15 lakh pulls its DSCR down.

Option (1) P has the higher ICR as well as the higher DSCR. — Incorrect. This leaves the repayment out of DSCR: P 30 ÷ 5 = 6, Q 20 ÷ 4 = 5.

Option (2) Q has the higher ICR as well as the higher DSCR. — Incorrect. Q’s ICR is 6, which is below P’s 7.

Option (3) Q has the higher ICR, but P has the higher DSCR. — Incorrect. This reverses both results.

NCERT (2026-27 Edition): “2. Interest Coverage Ratio (ICR): The interest coverage ratio refers to the number of times earnings before interest and taxes of a company covers the interest obligation. …”

“3. Debt Service Coverage Ratio (DSCR): Debt Service Coverage Ratio takes care of the deficiencies referred to in the Interest Coverage Ratio (ICR). The cash profits generated by the operations are compared with the total cash required for the service of the debt and the preference share capital. … A higher DSCR indicates better ability to meet cash commitments and consequently, the company’s potential to increase debt component in its capital structure.”