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Where, PBIT means profit before interest, and taxes A very high interest coverage ratio indicates that the firm is conservative in using debt and a very low ratio indicates excessive use of debt. Interest cover indicates how many times a company can its current interest payments out of current profit. b) Debt service coverage ratio: Debt service coverage ratio (DSCR) is the key indicator to the lender to the extent of ability of the borrower to service the loan in regard to timely payment of interest and repayment of loan installment it indicates whether the business is earning sufficient profit amount. The DSCR is calculated as follows: 29 DSCR = profit after tax +depreciation +interest on loan Interest on loan + loan in a year A ratio of two or more is considered satisfactory by the financial institution. The higher debt service the better debt servicing capacity of the company. Illustration 1: Preeti Ltd has the following data for projection for the next five years. It has an existing term-long of Rs 360 lakhs repayable over the next 5 years and got sanctions for new term loan for Rs 450 lakhs which is also repayable in 5 years. As a finance manager you are required to calculate; (a) Interest coverage ratio (b) Debt service coverage ratio for each of the 5 years and offer your comments. Rs lakhs Particulars 1 2 3 45 Profit after tax 480 575 635 650 685 Depreciation 155 150 140 135 120 Taxation 125 203 254 275 299 Interest on term loans 162 125 87 50 16 Repayment of term loans 178 178 178 178 178