Question

From the following information, calculate the Interest Coverage Ratio: Net Profit after Tax ₹ 4,25,000; Tax ₹ 75,000; Interest on Long-term Funds ₹ 1,25,000.

Hint: Find Profit before Interest and Tax by adding Profit after Tax, Tax and Interest.

Answer 1

Given:

Net Profit after Tax: ₹ 4,25,000

Tax: ₹ 75,000

Interest on Long-term Funds: ₹ 1,25,000

Calculation of Net Profit before Interest and Tax:

Using the provided hint:

\[\text{Profit before Interest and Tax} = \text{Net Profit after Tax} + \text{Tax} + \text{Interest}\]

$$\text{Profit before Interest and Tax} = ₹ 4,25,000 + ₹ 75,000 + ₹ 1,25,000$$

$${\text{Profit before Interest and Tax (EBIT)} = ₹ 6,25,000}$$

Calculation of Interest Coverage Ratio:

$$\text{Interest Coverage Ratio} = \frac{\text{Net Profit before Interest and Tax (EBIT)}}{\text{Interest on Long-term Funds}}$$

$$\text{Interest Coverage Ratio} = \frac{6,25,000}{1,25,000} = 5$$

Interest Coverage Ratio = 5 Times