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Question
Interest Coverage Ratio can be calculated as ______?
Options
Net Profit before Interest and Tax/Interest on long term debt
Interest on long term debt/Net Profit before Interest and Tax
Shareholders' Funds/Capital employed (or net assets)
None of these
Solution
Interest Coverage Ratio can be calculated as Net Profit before Interest and Tax/ Interest on long term debt.
Explanation:
It is a ratio that deals with the repayment of loan interest. It is a measure of interest payable on long-term debt security. It depicts the link between available profits for interest payment and the amount of interest due.
It is calculated as follows:
Interest Coverage Ratio = Net Profit before Interest and Tax/Interest on long term debt.
Significance: It shows how many times the interest on long-term debt is covered by interest-paying profits. A greater ratio implies the availability of surplus for shareholders while also ensuring the safety of interest payment debt.
