20 November 2009
What is the formula of Interest Coverage ratio? Is it Profit before Interest & Tax / Interest? or Profit before depreciation, Interest & Tax / Interest?
20 November 2009
It should be Profit before Tax, interest & Depreciation or any other non cash exp, as we have to find out capability of firm to pay interest on loans & that can be judged only through cash profits available before payament of such interest.
20 November 2009
Hi Mala, with due respect to above answers, it is also known as time-interest-earned ratio. this ratio measures the debt servicing capacity of the firm insofar as fixed interest on long-term loan is concerned.it is determined by dividing the operating profits or EBIT BY THE FIXED INTEREST CHARGE ON LOAN as EBIT/Interest. this ratio indicates the extent to which a fall in EBIT is tolerable. suppose if this ratio is 10 times it means even if the firms EBIT declines to 1/10th of the present level, it would still be equivalent to the claims of the lenders. we never consider cash profit for the same. thanks and regards, CA Shakuntala Chhangani
22 November 2009
Depreciation is a charge on profit. just because it is not paid in the current year but in the year of purchase, you cant ignore it from expenses. this ratio just explains who many times the PROFIT EARNED (and not CASH PROFITS) by the co. covers its interest liability
CAclubindia
