Q. With reference to Interest coverage ratio, consider the following statements:
1.Creditors often use this formula to determine a company’s riskiness relative to its current debt or for future borrowing.
2.Generally, a Lower coverage ratio is better, although the ideal ratio may vary by industry.
Which of the statements given above is/are correct?
Answer: A
Notes:
The interest coverage ratio is used to measure how well a firm can pay the interest due on outstanding debt.
The interest coverage ratio is calculated by dividing a company’s earnings before interest and taxes (EBIT) by its interest expense during a given period.
Generally, a higher coverage ratio is better, although the ideal ratio may vary by industry.
Source- Article
