Identify the ratio with which the following formula is associated:
\( \displaystyle \frac{\text{Profit after tax + Depreciation + Interest + Non-cash exp.}}{\text{Pref. Div + Interest + Repayment obligation}} \)
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Debt Service Coverage Ratio
Option (1) Interest Coverage Ratio — Incorrect. This ratio compares earnings before interest and tax with the interest payable only. It leaves out repayment of the loan, preference dividend and non-cash expenses.
Option (2) Debt Service Coverage Ratio — Correct. The DSCR compares the cash profit of the business with all the cash it must pay out on its debt and preference capital. The numerator adds back depreciation, interest and other non-cash expenses to the profit after tax. The denominator adds the preference dividend, the interest and the repayment of the loan. A higher DSCR shows the firm can meet its commitments and can safely borrow more.
Option (3) Return on Investment — Incorrect. RoI measures the profit earned on the total capital employed. It has nothing to do with repayment obligations.
Option (4) Financial Leverage — Incorrect. Financial leverage is the proportion of debt in the total capital. It is not a formula of cash profits against payments due.
NCERT (2026-27 Edition): “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. …”
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