Asset coverage ratio

Asset coverage ratio determines a company's ability to cover debt obligations with its assets after all liabilities have been satisfied. Asset coverage ratio is important if the company wants to increase its debt (e.g. get loan). The bank will check asset coverage ratio first to test whether the company is able to pay its debts. The formula is:

Asset Coverage Ratio = ((Assets – Intangible Assets) – (Current Liabilities – Short-term Debt)) / Total Debt

Three types of coverage ratios

Coverage ratio presents whether a company is able to pay its debts. The higher the coverage ratio, the better. The most information analysts can get from analysis of trends of coverage ratio over time. There are three main coverage ratios:

  • interest coverage ratio - shows whether company is able to pay interest related to its debt,
  • debt service coverage ratio - describes whether company is able to pay all the debts,
  • asset coverage ratio - as above, but calculation based on balance sheet

References

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