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 going to give a loan to.

2. It helps in evaluating the emerging risk of a firm that a bank is going to give a 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 1

Correct option is (a) 1 and 2 only

"A higher Interest coverage ratio ensures safety of interest on debts."

Third statement is wrong. Statement 1 is correct, By looking at the interest coverage ratio we can identify the present risk of a firm (That it is not generating good revenue). There is only "A" option where statement 1 is present.