Monday, May 21, 2012

This could further slow down growth

The interest coverage ratio (EBIT/ Interest expense) is an important parameter in financial analysis. It is used to determine how comfortably a company is placed in terms of payment of interest on outstanding debt. The lower the ratio, the greater are the risks. If you apply this parameter to Indian companies, the result is quite dismal. About 241 Indian companies of the BSE-500 index that have announced their March quarter results so far. On an average, these companies were able to cover interest expenses just 4.9 times. This is the lowest level in the last five years. Slowing economic growth and high interest rates are the main reasons for this. There are fair chances that this will worsen even further. In fact, as per ratings agency Crisil, Indian lenders are likely to restructure a further Rs 1 trillion worth of loans in the current financial year. Even worse, poor interest coverage has a direct impact on capital spending. In other words, companies may postpone their projects and investment in order to maintain their financial health. This could further slow down growth of the Indian economy.  

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