UPSC Previous Year Question | Prelims GS | 2020

What is the importance of the term 'Interest Coverage Ratio' of a firm in India? 1. It helps in understanding the present risk of a firm that a bank is going to give loan to. 2. It helps in evaluating the emerging risk of a firm that a bank is going to give loan to. 3. The higher a borrowing firm's level of Interest Coverage Ratio, the worse is its ability to service its debt.

  1. 1 and 2 only
  2. 2 only
  3. 1 and 3 only
  4. 1, 2 and 3

Answer

Correct Answer

1 and 2 only

Explanation

The Interest Coverage Ratio (EBIT divided by interest expense) tells lenders how comfortably a firm can pay interest, and it shows both present and emerging risk. A higher ratio means a better ability to service debt, so statement 3 is wrong.

Topics: banking & financial analysis, economy, interest coverage ratio, money & banking