Question
Calculate the interest coverage ratio of a company is it
reported Net profit after tax of Rs.60,000, falls under 40% Tax rate and has 15% Debentures of Rs.10 00,000.Solution
Interest Coverage Ratio = EBIT/ Interest Interest = 15% of 10,00,000 = 150,000 To calculate EBIT, we back calculate to add back tax and interest to net profit after tax as follows: Net profit after tax = PBT – Tax So, 60,000 = PBT – 40%*PBT PBT = 60000/0.6 = 100000 EBIT – Interest = PBT So, EBIT = PBT +Int = 1,00,000+1,50,000 = 2,50,000 So, Interest Coverage Ratio = 250,000/150,000 = 1.67
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