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:

1 and 2 only

2 only

1 and 3 only

1, 2 and 3

APEDIA

UPSC Prelims

2020 • 04 Oct, 2020 • Paper-1

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:

Correct Answer

1 and 2 only

Definition of ICR: The Interest Coverage Ratio (ICR) is a fundamental financial metric used by banks to determine how easily a company can pay interest on its o......

💡 Analysis & Explanation

Definition of ICR ▼

The Interest Coverage Ratio (ICR) is a fundamental financial metric used by banks to determine how easily a company can pay interest on its outstanding debt. It is calculated by dividing a company's earnings before interest and taxes (EBIT) by its interest expense.

Risk Evaluation Utility ▼

By analyzing current and projected earnings against interest obligations, banks use the ICR to accurately gauge both the immediate present risk (Point 1) and the foreseeable emerging financial risks (Point 2) before extending a corporate loan.

Inverse Logic Error ▼

A higher ICR indicates that the company is generating ample revenue to cover its interest payments comfortably. Therefore, a higher ratio means a 'better' ability to service debt, not 'worse'. This makes statement 3 fundamentally incorrect.

Conclusion ▼

Only the first two statements describe the true utility of the ratio.

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