The Interest Coverage Ratio (ICR) can be calculated as?
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → ICR = EBIT / Interest
Option (1) ICR = Net profit / Interest — Incorrect. Net profit is struck after interest and tax have already been charged, so it understates the earnings actually available to meet that interest.
Option (2) ICR = Debt / Interest — Incorrect. This compares one liability with another and says nothing about the firm’s capacity to earn.
Option (3) ICR = EBIT / Interest — Correct. Interest is a charge against profit paid before interest and tax are deducted, so the earnings genuinely available to meet it are EBIT. A high ratio means the firm can service more debt safely; a low one warns against further borrowing.
Option (4) ICR = Equity / Interest — Incorrect. Equity is a source of funds, not an earning, so it cannot measure coverage of interest.
NCERT (2026-27 Edition):
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