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CA. Mala Rohara (Querist)
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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?

CA CS CIMA Prakash Somani

CA CS CIMA Prakash Somani (Expert)
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20 November 2009 It should be Profit before dep, int and tax as the concept is how much coverage you can make for interest payment :)

CA. Rishabh Mittal

CA. Rishabh Mittal (Expert)
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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.

shakuntala chhangani

shakuntala chhangani (Expert)
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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

CA Ravi Sisodia

CA Ravi Sisodia (Expert)
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20 November 2009 I think formula of Interest Coverage ratio (Profit before interst and Tax but after Depreciation / Interst)

shakuntala chhangani

shakuntala chhangani (Expert)
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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

CA Ravi Sisodia

CA Ravi Sisodia (Expert)
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22 November 2009 yes,only profit(not cash profit)

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