Check sibling questions
Accounts and Finance
Step 7 Ratio Analysis

Types of loans and coverage ratios relevant

Normally person take 2 types of loan

1.OD/CC (overdraft/cash credit)

2.TL (Term Loan)                 

 

OD/CC

Term Loan

They are taken to meet working capital requirement of business

i.e.

to meet day to day expenses of business

They are normally taken for purchasing fixed assets of business

There is no repayment of OD/CC.

Only interest amount is to be paid, not the principal

 

They are like negative balance in bank account.

Interest is charged only on amount withdrawn

 

 

There is proper repayment of both principal an interest amount.

It is normally done in equal quarterly or monthly instalments (EMI)

Interest Coverage Ratio(ICR)  is used to measure repayment

 

Debt Service Coverage Ratio (DSCR)  is used to measure repayment

Formula for Interest Coverage Ratio(ICR)

 

(PAT+Interest Exp +Depreciation)/ Interest Repaid

 

 

 

Formula for Interest Coverage Ratio(ICR)

 

(PAT+Interest Exp +Depreciation) / Interest and Principal Repaid

 

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Davneet Singh is a graduate from Indian Institute of Technology, Kanpur. He has been teaching from the past 12 years. He provides courses for Maths and Science at Teachoo.