Interest Coverage Ratio
This ratio measures the debt servicing capacity of the firm in so far as fixed interest on a long term is concerned. From the point of view of the creditors, the larger the coverage (of around 12 times in the years 1995-97), the larger the ability of the company to handle fixed charge abilities and the more assured is the payment of interest. However, lower debt ratio during that period implies unused debt capacity. During the year 1986 to 1991 the coverage had fall to just 1.5 times due to increased reliance on the long term debst by the company with no proportional increase in the earnings. However lately the company maintains an average coverage of 4 times. This indicates that a fall in operating income upto one forth level is tolerated in the sense that the ability of the company to service its interest payments would not be adversely affected. The ability of the company to service interest payments out of cash available is also favorable.
This ratio measures the debt servicing capacity of the firm in so far as fixed interest on a long term is concerned. From the point of view of the creditors, the larger the coverage (of around 12 times in the years 1995-97), the larger the ability of the company to handle fixed charge abilities and the more assured is the payment of interest. However, lower debt ratio during that period implies unused debt capacity. During the year 1986 to 1991 the coverage had fall to just 1.5 times due to increased reliance on the long term debst by the company with no proportional increase in the earnings. However lately the company maintains an average coverage of 4 times. This indicates that a fall in operating income upto one forth level is tolerated in the sense that the ability of the company to service its interest payments would not be adversely affected. The ability of the company to service interest payments out of cash available is also favorable.