{"id":1704,"date":"2024-03-28T22:42:29","date_gmt":"2024-03-28T17:12:29","guid":{"rendered":"https:\/\/lotusarise.com\/qna\/?p=1704"},"modified":"2024-04-03T07:16:20","modified_gmt":"2024-04-03T01:46:20","slug":"q-what-is-the-importance-of-the-term-interest-coverage-ratio-of-a-firm-in-india","status":"publish","type":"post","link":"https:\/\/lotusarise.com\/qna\/upsc\/q-what-is-the-importance-of-the-term-interest-coverage-ratio-of-a-firm-in-india","title":{"rendered":"Q. What is the importance of the term \u201cInterest Coverage Ratio\u201d of a firm in India?"},"content":{"rendered":"\n
    \n
  1. It helps in understanding the present risk of a firm that a bank is going to give a loan to.<\/li>\n\n\n\n
  2. It helps in evaluating the emerging risk of a firm that a bank is going to give a loan to.<\/li>\n\n\n\n
  3. The higher a borrowing firm\u2019s level of Interest Coverage Ratio, the worse<\/strong> is its ability to service its debt.<\/li>\n<\/ol>\n\n\n\n

    Select the correct<\/strong> answer using the code given below:<\/p>\n\n\n\n

      \n
    • 1 and 2 only<\/li>\n\n\n\n
    • 2 only<\/li>\n\n\n\n
    • 1 and 3 only<\/li>\n\n\n\n
    • 1, 2 and 3<\/li>\n<\/ul>\n\n\n\n
      \n

      Answer: (a) 1 and 2 only<\/strong><\/p>\n<\/blockquote>\n\n\n\n

      Interest Coverage Ratio<\/h5>\n\n\n\n
        \n
      • The Interest Coverage Ratio (ICR) is a financial ratio that is used to determine how well a company can pay the interest on its outstanding debts<\/strong>.<\/li>\n\n\n\n
      • The ICR is commonly used by lenders, creditors, and investors to determine the riskiness of lending capital to a company. <\/strong>The interest coverage ratio is also called the \u201ctimes interest earned\u201d ratio.<\/strong><\/li>\n\n\n\n
      • The Interest Coverage Ratio (ICR) of a firm is a measure of its ability to pay its interest expenses on outstanding debt<\/strong>.<\/li>\n\n\n\n
      • It is calculated by dividing a company\u2019s earnings before interest and taxes (EBIT) by its interest expenses<\/strong>.<\/li>\n\n\n\n
      • A\u00a0higher ICR indicates that a company is generating sufficient earnings to meet its interest obligations<\/strong>, while a lower ICR suggests that the company may have difficulty servicing its debt.\n
          \n
        • The lower the interest coverage ratio, the greater the company\u2019s debt and the possibility of bankruptcy. Intuitively, a lower ratio indicates that less operating profits are available to meet interest payments and that the company is more vulnerable to volatile interest rates<\/strong>.<\/li>\n\n\n\n
        • Therefore, a higher interest coverage ratio indicates stronger financial health<\/strong> \u2013 the company is more capable of meeting interest obligations.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n\n\n\n
          \"Interest<\/figure>\n\n\n\n
            \n
          • Primary Uses of Interest Coverage Ratio<\/strong>:\n
              \n
            • ICR is used to determine the ability of a company to pay its interest expense on outstanding debt.<\/li>\n\n\n\n
            • ICR is used by lenders, creditors, and investors to determine the riskiness of lending money to the company.<\/li>\n\n\n\n
            • ICR is used to determine company stability \u2013 a declining ICR is an indication that a company may be unable to meet its debt obligations in the future.<\/li>\n\n\n\n
            • ICR is used to determine the short-term financial health of a company.<\/li>\n\n\n\n
            • Trend analysis of ICR gives a clear picture of the stability of a company in regard to interest payments.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n\n\n\n
              Debt-Service Coverage Ratio (DSCR)<\/h6>\n\n\n\n
                \n
              • The Debt Service Coverage Ratio (sometimes called DSC or DSCR) is a credit metric used to understand how easily a company\u2019s operating cash flow can cover its annual interest and principal obligations.<\/strong><\/li>\n\n\n\n
              • Because the Debt Service Coverage Ratio also includes principal obligations in the denominator, it\u2019s considered a very useful metric when a corporate borrower has reducing term debt in its capital structure (meaning monthly or annual principal repayments).<\/li>\n\n\n\n
              • A higher DSC ratio is better than a lower one, with a typical minimum requirement of 1.25x.<\/strong><\/li>\n<\/ul>\n\n\n\n
                \"Debt<\/figure>\n","protected":false},"excerpt":{"rendered":"

                Select the correct answer using the code given below: Answer: (a) 1 and 2 only Interest Coverage Ratio Debt-Service Coverage Ratio (DSCR)<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_kad_blocks_custom_css":"","_kad_blocks_head_custom_js":"","_kad_blocks_body_custom_js":"","_kad_blocks_footer_custom_js":"","_kad_post_transparent":"","_kad_post_title":"","_kad_post_layout":"","_kad_post_sidebar_id":"","_kad_post_content_style":"","_kad_post_vertical_padding":"","_kad_post_feature":"","_kad_post_feature_position":"","_kad_post_header":false,"_kad_post_footer":false,"_kad_post_classname":"","footnotes":""},"categories":[1,3],"tags":[38],"years":[53],"class_list":["post-1704","post","type-post","status-publish","format-standard","hentry","category-upsc","category-prelims","tag-indian-economy","years-53"],"acf":[],"taxonomy_info":{"category":[{"value":1,"label":"UPSC"},{"value":3,"label":"Prelims"}],"post_tag":[{"value":38,"label":"Indian Economy"}],"years":[{"value":53,"label":"2020"}]},"featured_image_src_large":false,"author_info":{"display_name":"LotusArise","author_link":"https:\/\/lotusarise.com\/qna\/author\/team-lotusarise"},"comment_info":0,"category_info":[{"term_id":1,"name":"UPSC","slug":"upsc","term_group":0,"term_taxonomy_id":1,"taxonomy":"category","description":"","parent":0,"count":1269,"filter":"raw","cat_ID":1,"category_count":1269,"category_description":"","cat_name":"UPSC","category_nicename":"upsc","category_parent":0},{"term_id":3,"name":"Prelims","slug":"prelims","term_group":0,"term_taxonomy_id":3,"taxonomy":"category","description":"","parent":1,"count":1251,"filter":"raw","cat_ID":3,"category_count":1251,"category_description":"","cat_name":"Prelims","category_nicename":"prelims","category_parent":1}],"tag_info":[{"term_id":38,"name":"Indian Economy","slug":"indian-economy","term_group":0,"term_taxonomy_id":38,"taxonomy":"post_tag","description":"","parent":0,"count":225,"filter":"raw"}],"_links":{"self":[{"href":"https:\/\/lotusarise.com\/qna\/wp-json\/wp\/v2\/posts\/1704","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/lotusarise.com\/qna\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/lotusarise.com\/qna\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/lotusarise.com\/qna\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/lotusarise.com\/qna\/wp-json\/wp\/v2\/comments?post=1704"}],"version-history":[{"count":0,"href":"https:\/\/lotusarise.com\/qna\/wp-json\/wp\/v2\/posts\/1704\/revisions"}],"wp:attachment":[{"href":"https:\/\/lotusarise.com\/qna\/wp-json\/wp\/v2\/media?parent=1704"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/lotusarise.com\/qna\/wp-json\/wp\/v2\/categories?post=1704"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/lotusarise.com\/qna\/wp-json\/wp\/v2\/tags?post=1704"},{"taxonomy":"years","embeddable":true,"href":"https:\/\/lotusarise.com\/qna\/wp-json\/wp\/v2\/years?post=1704"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}