Economy2020
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
- It helps in evaluating the emerging risk of a firm that a
- 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.
Explanation
The Interest Coverage Ratio (ICR) is a critical financial metric that reflects a firm's ability to meet its interest obligations from its earnings before interest and taxes (EBIT). A higher ICR indicates greater capacity to service debt, implying lower current risk and helping banks assess the present and emerging risk profiles of a firm before granting loans. Therefore, options 1 and 2 are correct, as they align with the fundamental purpose of the ICR in evaluating a firm's financial health and its borrower's risk assessment. Option 3 is incorrect because a higher ICR actually signifies better ability to service debt, not worse.