PYQ Question

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 goi

August 6, 2026 en

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 given 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. Select the correct answer using the code given below.

A. 1 and 2 only
B. 2 only
C. 1 and 3 only
D. 1, 2 and 3

Answer: A

Explanation

The interest coverage ratio is a debt ratio and profitability ratio used to determine how easily a company can pay interest on its outstanding debt. A higher coverage ratio is better, although the ideal ratio may vary by industry. Hence statement 3 is not correct. The Interest coverage ratio is also called “times interest earned.” Lenders, investors, and creditors often use this formula to determine a company’s riskiness relative to its current debt or for future borrowing. The interest coverage ratio is used to see how well a firm can pay the interest on outstanding debt. Also called the times-interest-earned ratio, this ratio is used by creditors and prospective lenders to assess the risk of lending capital to a firm. Hence statements 1 and 2 are correct.