Example 1

Suppose a person approached Bank for a Loan.He asks bank for a loan of 5000000 @ 12% p.a.

He says that from this loan, he will take start a business where he will earn every year Rs 400000

Will bank give him loan?

View Answer

What are Coverage Ratios

Ratios which are used to calculate whether compay has the profitability to repay loan is repayable is called coverage ratos

It measures how many timed of repayment the business is to be repaid

Formula

Profit After Tax+Dep+Interest/Total Amount Repaid

 

Ideal Ratio

If this ratio is less than 1,no bank will give loan

This ratio should be ideally atleat 1.5

Higher the ratio,the better

  1. Accounts and Finance
  2. Step 7 Ratio Analysis

About the Author

CA Maninder Singh's photo - Expert in Practical Accounts, Taxation and Efiling
CA Maninder Singh
CA Maninder Singh is a Chartered Accountant for the past 8 years. He provides courses for Practical Accounts, Taxation and Efiling at teachoo.com .