Asset Coverage Ratio

AAA

DEFINITION of 'Asset Coverage Ratio'

A test that determines a company's ability to cover debt obligations with its assets after all liabilities have been satisfied. It is calculated as the following:

Asset Coverage Ratio

INVESTOPEDIA EXPLAINS 'Asset Coverage Ratio'

When calculating the asset coverage ratio, investors should exercise caution with respect to asset value. Using the book value of assets may result in an inaccurate asset coverage ratio if the actual liquidation value of assets is significantly less. As a rule of thumb, utilities should have an asset coverage ratio of at least 1.5, and industrial companies should have a ratio of at least 2.

RELATED TERMS
  1. Asset

    1. A resource with economic value that an individual, corporation ...
  2. Coverage Ratio

    A measure of a company's ability to meet its financial obligations. ...
  3. Current Liabilities

    A company's debts or obligations that are due within one year. ...
  4. Intangible Asset

    An asset that is not physical in nature. Corporate intellectual ...
  5. Debt

    An amount of money borrowed by one party from another. Many corporations/individuals ...
  6. Net Liquid Assets

    A measure that examines a company's net liquid financial assets. ...
Related Articles
  1.  Here we take a look at how you can evaluate whether the debt will affect your investment.
    Investing Basics

    Will Corporate Debt Drag Your Stock Down?

    Borrowed funds can mean a leg up for companies or the boot for investors. Find out how to tell the difference.
  2. Fundamental Analysis

    Ratio Analysis Tutorial

    If you don't know how to evaluate a company's present performance and its possible future performance, you need to learn how to analyze ratios.
  3. Investing

    Debt Reckoning

    Learn about debt ratios and how to use them to assess a company's financial health. You could save a lot of money!
  4. Options & Futures

    Advanced Financial Statement Analysis

    Learn what it means to do your homework on a company's performance and reporting practices before investing.
  5. Fundamental Analysis

    What is a good interest coverage ratio?

    Learn the importance of the interest coverage ratio, one of the primary debt ratios analysts use to evaluate a company's financial health.
  6. Fundamental Analysis

    What is a bad interest coverage ratio?

    Understand how interest coverage ratio is calculated and what it signifies, and learn what market analysts consider to be an unacceptably low coverage ratio.
  7. Technical Indicators

    What is a good gearing ratio?

    Understand the meaning of the gearing ratio, how it is calculated, the definition of high and low gearing, and how they reflect relative financial stability.
  8. Investing Basics

    What is the difference between the gearing ratio and the debt-to-equity ratio?

    Dive deeper into gearing ratios: what are they, how are they used and why the debt to equity ratio is one of the most popular analytical gearing tools.
  9. Investing Basics

    What is the difference between interest coverage ratio and TIE?

    Read about the times interest earned, also known as the interest coverage ratio. Find out why this is an important ratio for investors and creditors.
  10. Investing Basics

    What is accrual accounting used for in finance?

    Read about the accrual method of accounting, its uses and rules, and why it is considered so important for investors, lenders and managers.

You May Also Like

Hot Definitions
  1. Santa Claus Rally

    A surge in the price of stocks that often occurs in the week between Christmas and New Year's Day. There are numerous explanations ...
  2. Commodity

    1. A basic good used in commerce that is interchangeable with other commodities of the same type. Commodities are most often ...
  3. Deferred Revenue

    Advance payments or unearned revenue, recorded on the recipient's balance sheet as a liability, until the services have been ...
  4. Multinational Corporation - MNC

    A corporation that has its facilities and other assets in at least one country other than its home country. Such companies ...
  5. SWOT Analysis

    A tool that identifies the strengths, weaknesses, opportunities and threats of an organization. Specifically, SWOT is a basic, ...
  6. Simple Interest

    A quick method of calculating the interest charge on a loan. Simple interest is determined by multiplying the interest rate ...
Trading Center