A corporation generates an Operating Profit (EBIT) of ₹800 Crore and incurs annual Gross Interest Expenses of ₹160 Crore. What is the firm's Interest Coverage Ratio (ICR)?

[ A ]0.20x (Inverted ratio: Interest / EBIT)

[ B ]5.00x [ EBIT / Interest Expense = ₹800 Cr / ₹160 Cr; confirms strong solvency safety margin ][ CORRECT ]

[ C ]4.00x

[ D ]1.25x

Takeaway

Option B is correct: 5.00x [ EBIT / Interest Expense = ₹800 Cr / ₹160 Cr; confirms strong solvency safety margin ]

Derivation

Interest Coverage Ratio answers a specific solvency question: how many times over can the firm's operating profit pay its interest obligations before those obligations become a genuine default risk? ICR = EBIT / Interest Expense = ₹800 Cr / ₹160 Cr = 5.00x. Credit analysts generally treat a ratio above roughly 3.0x as indicating healthy debt serviceability with a comfortable cushion, while a ratio dropping below about 1.5x signals the firm's operating profit is barely covering its interest bill, raising real default and credit-downgrade risk. At 5.00x, this firm's EBIT covers its interest expense five times over, meaning operating profit could fall substantially before interest payments themselves became a genuine solvency concern.

Why the others fail

A — 0.20x (Inverted ratio: Interest / EBIT)

Inverts the ratio, dividing Interest Expense by EBIT instead of EBIT by Interest Expense, which produces a fraction far below the correct 5.00x coverage figure.

C — 4.00x

Does not correspond to correctly dividing the given EBIT of ₹800 Crore by the Interest Expense of ₹160 Crore, which yields exactly 5.00x, not this figure.

D — 1.25x

Substantially understates the firm's actual interest coverage; dividing ₹800 Crore EBIT by ₹160 Crore interest expense correctly yields 5.00x, not this lower figure.