## The interest coverage ratio measures the organization’s operating profit capacity to pay the interest.

### accounting

##### Description

Ratio Analysis

1)      Interest Coverage Ratio

The interest coverage ratio measures the organization’s operating profit capacity to pay the interest.  It measures how many times the operating profit of company can be used to pay the interest. The ICR of PRA health in 2018 and 2019 was 4.93 and 7.02 respectively (PRAHS, 2019). The ICR of company is shown below: -

Interest Coverage Ratio = EBIT / Interest

Interest Coverage Ratio in 2018 = \$281 million / \$57 million = 4.93

Interest Coverage Ratio in 2019 = \$365 million / \$52 million = 7.02

2)      Days Sales Outstanding

The Days Sales Outstanding (DSO) measures the time taken by PRC health to receive the cash from debtors. The DSO of PRC health in 2018 and 2019 was 56.62 and 56.19, respectively. It shows that the organization took 57 days to recover cash from debtors (PRAHS, 2019).

DSO = (Average Accounts Receivable/Total Sales)*365

DSO in 2018 = (\$445.5 million/\$2,872 million)*365 = 56.62

DSO in 2019 = (\$472 million / \$3,066 million)*365 = 56.19

3)      Payable Period

The Days Payable Ratio or payable period shows the time taken by the organization is paying the cash to their creditors (Arnold & Lewis, 2019). The payable period of PRA health in 2018 and 2019 was 9.61 and 8.25, respectively (PRAHS, 2019).

Payable Period = (Average Accounts Payable/COGS)*365

Payable Period in 2018 = (\$54.5 million / \$2,071 million)*365 = 9.61

Payable Period in 2019 = (\$49.5 million / \$2,190 million)*365 = 8.25

4)      Gross Margin

The gross margin is used for measuring the profitability of the company (Brigham & Ehrhardt, 2016). The gross margin of PRC health in 2018 was 27.89%. It increased to 28.59% in 2019 (PRAHS, 2019). The increase shows that the gross profit of the company has increased in the year.

Gross Margin = Gross Profit / Revenue

Gross Margin in 2018 = \$801 million / \$2,872 million = 27.89%

Gross Margin in 2019 = \$877 million / \$3,066 million = 28.60%

5)      Net Margin

The Net margin shows the analysis of the overall profit of the company (Arnold & Lewis, 2019). The net margin of PRC health in 2018 was 5.63%, which increased to 9.93% in 2019 (PRAHS, 2019).

Net Margin = Net Profit / Revenue

Net Margin in 2018 = \$154 million / \$2,872 million = 5.36%

Net Margin in 2019 = \$243 million / \$3,066 million = 7.93%

# References

Arnold, G., & Lewis, D. (2019). Corporate Financial Management (6th ed.). Pearson.

Brigham, E. F., & Ehrhardt, M. C. (2016). Financial Management: Theory & Practice (15th ed.). Cengage Learning.

PRAHS. (2019, December 31). PRA Health Sciences, Inc. Retrieved from Prahs: https://investor.prahs.com/static-files/7a2a2c9d-e30c-4feb-b1eb-d668f5049cff

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