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. Solvency

    The ability of a company to meet its long-term financial obligations. ...
  2. Intangible Asset

    An asset that is not physical in nature. Corporate intellectual ...
  3. Current Liabilities

    A company's debts or obligations that are due within one year. ...
  4. Coverage Ratio

    A measure of a company's ability to meet its financial obligations. ...
  5. Asset

    1. A resource with economic value that an individual, corporation ...
  6. Book Value

    1. The value at which an asset is carried on a balance sheet. ...
RELATED FAQS
  1. When should a company consider issuing a corporate bond vs. issuing stock?

    A company should consider issuing a corporate bond versus issuing stock after it has already exhausted all internal forms ... Read Full Answer >>
  2. What is price-to-book ratio is typical in the electronics sector?

    In fundamental analysis, book value is an important concept for measuring a business's value. Book value equals total assets ... Read Full Answer >>
  3. What price-to-earnings ratio is average in the real estate sector?

    The price-to-earnings (P/E) ratio is a commonly cited valuation metric that can help investors decide what stock price is ... Read Full Answer >>
  4. How does private placement affect share price?

    Private placement is a common method of raising business capital through offering equity shares. Private placements can be ... Read Full Answer >>
  5. How can I calculate the tracking error of an ETF or indexed mutual fund?

    Calculate the tracking error of an indexed exchange-trade fund (ETF) or mutual fund by doing a standard deviation percentage ... Read Full Answer >>
  6. How is deferred revenue treated under accrual accounting?

    In accrual accounting, deferred revenue, or unearned revenue, represents a liability on the balance sheet recorded on funds ... Read Full Answer >>
Related Articles
  1. 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

    Online Gaming Industry Stocks

    A look at some of the top stocks in the online gaming industry.
  6. Stock Analysis

    Invest In Cyber Security With These Stocks

    Learn about some amazing cyber security plays in this hot sector.
  7. Fundamental Analysis

    Tesla Home Batteries Could Transform Your Electric Bill

    With limited daylight hours, solar power cannot power our homes at night, but Tesla Motors might help solve that problem.
  8. Fundamental Analysis

    Understanding Lululemon's Business Model

    Lululemon has succeeded in marketing more than just fitness apparel. The company has strategies for continued growth, but it faces tough competition.
  9. Home & Auto

    Buying a Home? The Best Places Share This Feature

    The most lucrative areas to invest in a home are cities where job growth is robust.
  10. Technical Indicators

    6 Stocks for Millennials (or Anyone)

    Savvy Millennial investors looking for long-term winners should take a look at these stocks.

You May Also Like

Hot Definitions
  1. Net Worth

    The amount by which assets exceed liabilities. Net worth is a concept applicable to individuals and businesses as a key measure ...
  2. Stop-Loss Order

    An order placed with a broker to sell a security when it reaches a certain price. A stop-loss order is designed to limit ...
  3. Covered Call

    An options strategy whereby an investor holds a long position in an asset and writes (sells) call options on that same asset ...
  4. Butterfly Spread

    A neutral option strategy combining bull and bear spreads. Butterfly spreads use four option contracts with the same expiration ...
  5. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
  6. Moving Average - MA

    A widely used indicator in technical analysis that helps smooth out price action by filtering out the “noise” from random ...
Trading Center