Question

Star Ltd.’s profit after Interest and Tax was ₹ 2,50,000. Its Current Assets were ₹ 10,00,000; Current Liabilities ₹ 5,00,000; Property, Plant and Equipment and Intangible Assets ₹ 15,00,000 and 10%, Long-term Debt ₹10,00,000. Tax Rate was 20%.

Calculate Return on Investment and Interest Coverage Ratio of Star Ltd.

Answer 1

1. Return on Investment (ROI)/Return on Capital Employed (ROCE)

\[\text{Profit Before Tax (PBT)} = \frac{\text{Profit After Interest \& Tax}}{100\% - \text{Tax Rate}} = \frac{₹2,50,000}{1 - 0.20} = {₹3,12,500}\]

$$\text{Interest on Long-term Debt} = ₹10,00,000 \times 10\% = {₹1,00,000}$$

$$\text{Profit Before Interest \& Tax (PBIT)} = \text{PBT} + \text{Interest} = ₹3,12,500 + ₹1,00,000 = {₹4,12,500}$$

$$\text{Working Capital} = \text{Current Assets} - \text{Current Liabilities} = ₹10,00,000 - ₹5,00,000 = {₹5,00,000}$$

$$\text{Capital Employed} = \text{Non-current Assets (PPE \& Intangibles)} + \text{Working Capital}$$

$$\text{Capital Employed} = ₹15,00,000 + ₹5,00,000 = {₹20,00,000}$$

$$\text{Return on Investment} = \frac{\text{PBIT}}{\text{Capital Employed}} \times 100 = \frac{₹4,12,500}{₹20,00,000} \times 100 = {20.635\% \text{ (or } 20.63\% )}$$

2. Interest Coverage Ratio

$$\text{Interest Coverage Ratio} = \frac{\text{Profit Before Interest and Tax (PBIT)}}{\text{Interest on Long-term Debt}}$$

$$\text{Interest Coverage Ratio} = \frac{₹4,12,500}{₹1,00,000} = {4.125 \text{ Times (or 4.13 Times)}}$$