What is the importance of the term Interest Coverage Ratio of a firm in India?It helps in understand

Question

What is the importance of the term Interest Coverage Ratio of a firm in India?It helps in understanding the present risk of a firm that a bank is going to give loan to.It helps in evaluating the emerging risk of a firm that a bank is going to give loan to.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.

Accepted Answer

The interest coverage ratio is a debt ratio and profitability ratio used to determine how easily a company can pay interest on its outstanding debt. A higher coverage ratio is better, although the ideal ratio may vary by industry. Hence statement 3 is not correct.The Interest coverage ratio is also called times interest earned. Lenders, investors, and creditors often use this formula to determine a company's riskiness relative to its current debt or for future borrowing. The interest coverage ratio is used to see how well a firm can pay the interest on outstanding debt. Also called the times-interest-earned ratio, this ratio is used by creditors and prospective lenders to assess the risk of lending capital to a firm. Hence statements 1 and 2 are correct.