top of page
< Back


What is the importance of the term “Interest Coverage Ratio” of a firm in India?

1. It helps in understanding the firms that a bank is going to give loan to.
2. It helps in evaluation the emerging risk of a firm that a bank is going to give loan to.
3. The higher a borrowing Firm’s level of interest coverage ratio, the worse is its ability to service its dept.

Select the correct answer using the code given below :

(a) 1 and 2 only
(b) 2 only
(c) 1 and 3 only
(d) 1, 2 and 3



To suggest corrections, send feedback using feedback button in top menu.

To suggest corrections, use feedback icon on top menu.


The interest coverage ratio is an important financial metric used by banks and financial institutions to assess the creditworthiness of a firm and its ability to service its debt. A higher interest coverage ratio indicates that a firm is generating sufficient earnings to cover its interest payments, which is seen as a positive indicator of financial health.

1. Statement 1 is correct: Banks use the interest coverage ratio to assess the ability of a firm to repay its loans. A higher interest coverage ratio gives confidence to the bank that the firm has enough earnings to meet its interest obligations.

2. Statement 2 is correct: The interest coverage ratio provides insight into the financial risk associated with a firm's debt. A lower interest coverage ratio indicates a higher risk of defaulting on interest payments, which is a concern for banks when considering loan approvals.

3. Statement 3 is incorrect: A higher interest coverage ratio signifies a better ability to service debt, not worse.


How was this explanation?

bottom of page