The interest coverage ratio is a debt and profitability ratio used to determine how easily a firm can pay or cover the interest on its outstanding debt. The government of India sets an inflation target for every five years. RBI has an important role in the consultation process regarding inflation targeting.
So Not depending on short-term foreign borrowings will provide immunity to India. Suppose a company has a profit after tax (PAT) of ₹1,00,000, and it has a long-term debt of ₹5,00,000 with an interest rate of 12%. While the ideal interest coverage ratio can vary across industries, a ratio above 2 is generally considered favorable. A ratio below 1.5 raises concerns about the company’s ability to meet its interest obligations without straining its interest coverage ratio upsc financial resources.
UPSC Prelim-2020 Answerkey: Economy section
This parameter is also known as the weighted average call money rate (WACR). The Monetary Policy Committee (MPC) determines the policy interest rate required to achieve the inflation target. The primary objective of monetary policy is to maintain price stability while keeping in mind the objective of growth. Price stability is a necessary precondition for sustainable growth.
Pillar#4C: Macroeconomic Indicators → Inflation
- The interest coverage ratio is a financial metric that measures companies’ ability to pay their outstanding debts.
- It is also known as the Times Interest Earned Ratio or TIE ratio.
- Monetary policy refers to the policy of the central bank – ie Reserve Bank of India – in matters of interest rates, money supply and availability of credit.
- She holds a Bachelor of Science in Finance degree from Bridgewater State University and helps develop content strategies.
- A zero-coupon bond is a debt security that does not pay interest but instead trades at a deep discount, rendering a profit at maturity, when the bond is redeemed for its full face value.
Download the Testbook App now and unlock a world of limitless learning opportunities. Enhance your UPSC exam preparation by enrolling in for UPSC coaching. Enhance your UPSC IAS exam preparation with this crucial component.
The Indian Banking system is recently criticized for the loans given to companies that repeatedly fail to pay back interest or principal. Unproductive firms popularly referred to as “zombies” are typically identified using the interest coverage ratio. There are many healthy and highly productive companies with an interest coverage ratio above 10. ‘Call Money’ is a short-term finance used for interbank transactions.
Ask Any Financial Question
At its core, the interest coverage ratio stands as a measure of a company’s capability to pay interest on its outstanding debts. This ratio gauges the relationship between a company’s earnings and its interest expenses, offering a clear picture of its debt servicing capacity. Many metrics can help you determine companies’ financial health and well-being and, therefore, your investment portfolio.
Do you already work with a financial advisor?
It is a useful tool for investors and creditors who want to assess a company’s risk profile and potential for growth. If a company has an Interest Coverage Ratio of 5, it means that the company can cover its interest payments five times over with its earnings. This is generally considered a good indication of a company’s financial health because it suggests that the company has a significant margin of safety and can comfortably make its interest payments. Interest coverage ratio is also known as debt service coverage ratio or debt service ratio.
The higher the ratio, the more easily the business will manage to pay the interest charge. Obviously, a company that cannot pay its interest charge has severe problems and might not be able to carry on, at least not without a fresh injection of funds. The interest coverage ratio (ICR) is an important and much-studied ratio. This is especially true when borrowing is high relative to shareholder funds. Let us understand the concept of interest coverage ratio with a solved example.
The denominator of the formula is the company’s interest expenses, which are the costs of servicing its debt. Similarly, a low interest coverage ratio indicates a higher debt burden on the company which increases the chances of bankruptcy. In such cases banks would hesitate to provide credit to the business. The optimal interest coverage ratio is not a one-size-fits-all number. It varies across industries, business models, and economic conditions. However, a general guideline is that a ratio above 2 is often considered favorable.
