Q.From the illustrative data in Section 1 (Net Profit before Interest and Tax ₹4,00,000; Interest on Debentures ₹40,000), calculate the Interest Coverage Ratio and comment on what it shows.

This ratio asks a simple, practical question: out of the profit the firm earns before paying any interest, how many times over could it pay the interest it actually owes?

Step 1 — Apply the formula.

Interest Coverage Ratio = Net Profit before Interest and Tax ÷ Interest on Long-term Debt = 4,00,000 ÷ 40,000 = 10 times.

Step 2 — Interpretation.

A ratio of 10 times means the company's operating profit (before deducting interest and tax) is ten times larger than the interest it must pay to its debenture holders each year. In practical terms, even if the company's profit were to fall very significantly, it would still be able to comfortably meet its interest obligation — a strong margin of safety. …

A common mistake is using Net Profit AFTER Tax (or after interest) in the numerator instead of Net Profit BEFORE Interest and Tax — the ratio deliberately uses the PRE-interest, pre-tax figure, since it is measuri …