Interest Coverage Ratio is a type of

$$Interest\quad Coverage\quad Ratio=$$$$\frac { EBIT }{ Interest\quad Expense } $$

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Let Earnings/Profit before taxes be

x- 30% of x = Profit After Taxes

Therefore, 7x/10

Hence, x = 800.

**Solvency Ratio that determines a company’s capacity to pay its Interests.**It is a measure of the profitability of a company relative to the interest payable.__Interest Coverage Ratio is also known as Times-Interest Earned Ratio.__$$Interest\quad Coverage\quad Ratio=$$$$\frac { EBIT }{ Interest\quad Expense } $$

**EBIT is Earnings Before Interest and Taxes**or the Gross earning of a company**Where,**- And
**Interest Expense**implies**Total Interest Payable by a Company.**

## Significance and Interpretation

**Interest Coverage Ratio = 1:**This implies that the gross profit of the company is just equal to the interest payable, this is an alarming situation for the company.**Interest Coverage Ratio < 1:**This implies that the gross profit of the company is not even enough to pay the interest dues, such companies are on the verge of getting insolvent.**Interest Coverage Ratio> 1:**This implies that the company’s gross profit is more than its interest payable, this seems to be good, but it is not enough for the company to grow and survive.- The
**ideal Interest Coverage Ratio is > 3,**below which it is not considered to be safe. However, for some industries, the Interest Coverage Ratio of 2-3 may be acceptable.__It must be noted that this limit may shift depending upon the regulatory reforms and/or type of business.__

### Examples

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**Example 1: **

**Earnings before Interest and taxes (EBIT) for M/S XYZ Ltd. is ₹5050 Crores, total debt is ₹4500 Crores on which interest is applicable at the rate of 10%. Calculate the Interest Coverage Ratio for M/S XYZ Ltd.**

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**Solution: **

**EBIT =**₹5050 Crores

**Total Interest =**10% of ₹4500 Crores

**⇨**₹450 Crores

**Interest Coverage Ratio =**EBIT / Total Interest

**⇨**5050/450

**⇨**101/9

**Hence, Interest Coverage Ratio = 101/9 = 11.22**

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**Example 2: **

**Profit after taxes for M/S ABC Ltd is ₹560 Crores, the rate of tax is 30% for companies. Total debt for the company is ₹750 Crores on which interest is applicable at a rate of 12%. Calculate the Interest Coverage Ratio for M/S ABC Ltd.**

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**Solution:**

Let Earnings/Profit before taxes be **x,**then as given:

x- 30% of x = Profit After Taxes

Therefore, 7x/10

**⇨**560

Hence, x = 800.

Hence Earning Before Taxes= ₹800 Crores

**Total Interest =**12% of 750 Crores**⇨**₹90 Crores

**Earnings Before Interest + Taxes**= Earnings Before Taxes + Interest

**⇨**

**800 + 90**

**⇨**

**₹890 Crores**

**Interest Coverage Ratio =**EBIT / Total Interest

**⇨**890/90

**⇨**89/9

**Hence, Interest Coverage Ratio = 89/9 or 9.89**