A corporate entity reports Operating Profit (EBIT) of Rs. 150 crore, Annual Finance Interest Expense of Rs. 30 crore, Current Assets of Rs. 200 crore (including Raw Material and Finished Inventory of Rs. 80 crore), and Current Liabilities of Rs. 100 crore. What are the company's Interest Coverage Ratio, Current Ratio, and Quick Ratio?

[ A ]Interest Coverage Ratio = 0.20x; Current Ratio = 1.20x; Quick Ratio = 2.00x

[ B ]Interest Coverage Ratio = 4.00x; Current Ratio = 3.00x; Quick Ratio = 0.80x

[ C ]Interest Coverage Ratio = 5.00x; Current Ratio = 2.00x; Quick Ratio = 1.20x[ CORRECT ]

[ D ]Interest Coverage Ratio = 10.00x; Current Ratio = 0.50x; Quick Ratio = 1.50x

Takeaway

Option C is correct: Interest Coverage Ratio = 5.00x; Current Ratio = 2.00x; Quick Ratio = 1.20x

Derivation

Formulas and computations: (1) Interest Coverage Ratio = Operating Profit (EBIT) / Interest Expense = Rs. 150 crore / Rs. 30 crore = 5.00x (indicating comfortable debt-servicing buffer). (2) Current Ratio = Current Assets / Current Liabilities = Rs. 200 crore / Rs. 100 crore = 2.00x. (3) Quick Ratio (Acid Test) = (Current Assets - Inventories) / Current Liabilities = (Rs. 200 crore - Rs. 80 crore) / Rs. 100 crore = Rs. 120 crore / Rs. 100 crore = 1.20x. This tests comprehensive solvency and liquidity metrics. The primary trap is including inventory in the quick ratio numerator.

Why the others fail

A — Interest Coverage Ratio = 0.20x; Current Ratio = 1.20x; Quick Ratio = 2.00x

Interest coverage of 0.20x inverts the formula (30 / 150), and inverts current and quick ratio outputs.

B — Interest Coverage Ratio = 4.00x; Current Ratio = 3.00x; Quick Ratio = 0.80x

4.00x is an arithmetic error for interest coverage, and 3.00x miscalculates the current ratio from balance sheet assets.

D — Interest Coverage Ratio = 10.00x; Current Ratio = 0.50x; Quick Ratio = 1.50x

10.00x miscalculates interest coverage, and 0.50x inverts the current ratio by dividing liabilities by assets (100 / 200).