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.
Select the correct answer using the code given below :
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Answer: A. The Interest Coverage Ratio is a firm's earnings before interest and tax divided by its interest payments. It shows how easily the firm can pay interest now, and trends in it show emerging risk. A higher ratio means a better ability to pay, not worse. So 1 and 2.
Watch for: Statement 3 flips the meaning; for this ratio, higher is safer.
Why the other options are wrong
- B. Wrong because it also shows present risk.
- C. Wrong because a higher ratio means better, not worse, ability to service debt.
- D. Wrong because statement 3 is false.
Source to check: RBI Financial Stability Report (corporate sector analysis); NCERT Class 12 Accountancy Part II, Chapter on Accounting Ratios
Answer from the official UPSC key. Written and fact-checked by AI against the official key. Spotted a mistake? Report it.