Timed written test: from Kanvika Cement's income statement and balance sheet, compute interest cover, debt service cover, fixed charge cover, net leverage and the current ratio, and say which one breaches the lender's policy.

Fixed charge cover breaches: 1.03x against a 1.10x floor. Interest cover is 4.36x, debt service cover 1.61x, net leverage 3.10x and the current ratio 1.09x, all inside policy. Kanvika earns its interest comfortably, but once Rs 150 crore of maintenance capex is paid, the cash left barely covers interest and principal. The shortfall to policy is about Rs 18 crore a year.

Derive the few numbers every ratio shares, once, before any ratio. Profit before tax is EBITDA 480 less depreciation 120 less interest 110, Rs 250 crore, so tax is Rs 62.5 crore, and debt service is interest plus principal, Rs 260 crore. With those three written down, each ratio is a single division. Under time pressure, candidates lose marks by recomputing tax three times and getting it different twice.

Interest cover is 480 over 110, 4.36x. Debt service cover is 480 less 62.5 of tax, over 260: 1.61x. Fixed charge cover also takes out Rs 150 crore of maintenance capex, the spending a cement plant cannot skip, leaving Rs 267.5 crore against Rs 260 crore: 1.03x. Net leverage is 1,650 less 160 of cash, over 480: 3.10x. The current ratio is 700 over 640: 1.09x.

Because it is the only one that counts the capex. A family earning well above its loan instalments can still be short each month once it pays the school fees it cannot skip. Kanvika's EBITDA covers interest easily, but cement plants eat cash to stay running, and after Rs 150 crore of maintenance capexSpending needed to keep existing plants working at their current capacity, as opposed to spending that adds new capacity. there is almost nothing to spare. That is why lenders to heavy industry care more about fixed charge cover than interest cover.

One line per ratio, then one paragraph on the exception. State the breach, its size and its cause: fixed charge cover of 1.03x against 1.10x, a shortfall of about Rs 18 crore of cash a year, driven by maintenance capex rather than weak earnings. Then say what you would ask: whether Rs 150 crore is truly maintenance or includes growth spending, and whether principal could be reprofiled. Also note that interest cover on EBIT rather than EBITDA would be 3.27x, still a pass, because definitions vary and a written test rewards stating yours.