“Interest coverage ratio” can be computed as:
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → EBIT/Interest
Option (1) PAT/Interest — Incorrect. Profit after tax is what is left after interest has been paid. It cannot show how well the earnings cover the interest.
Option (2) EBIT/Interest — Correct. The interest coverage ratio shows how many times the earnings before interest and taxes cover the interest to be paid. The higher the ratio, the lower the risk that the company fails to pay its interest.
Option (3) EBIT/(Interest + Depreciation) — Incorrect. Depreciation is not a payment to lenders, so it has no place in this ratio.
Option (4) PAT/(Interest + Depreciation) — Incorrect. It uses the wrong profit and adds depreciation as well.
NCERT (2026-27 Edition):
|
