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Interest coverage ratio is :
Question

Interest coverage ratio is :

A.

Profit before Tax / Interest on Debt

B.

Net Profit / Interest on Debt

C.

Profit before Interest and Taxes / Interest on Debt

D.

Long-term Debts / Interest on Debt

Correct option is C


The Interest Coverage Ratio (ICR) measures a company's ability to meet its interest obligations from its operating profit. The universally accepted formula is:

Profit before Interest and Taxes (EBIT) indicates the operating profit generated before financing costs and taxes are considered. Interest is a financing expense, so EBIT is the most relevant measure of earning capacity for this ratio.

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