The formula to compute the Interest Coverage ratio is:
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → $\frac{EBIT}{Interest}$
The interest coverage ratio refers to the number of times earnings before interest and taxes of a company covers the interest obligation.
This may be calculated as follows: ICR = EBIT/ Interest
The higher the ratio, lower shall be the risk of company failing to meet its interest payment obligations. However, this ratio is not an adequate measure. A firm may have a high EBIT but low cash balance.