Asset Coverage Ratio


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

BREAKING DOWN '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.

  1. Solvency

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

    An amount of money borrowed by one party from another. Many corporations/individuals ...
  3. Intangible Asset

    An asset that is not physical in nature. Corporate intellectual ...
  4. Net Liquid Assets

    A measure that examines a company's net liquid financial assets. ...
  5. Current Liabilities

    A company's debts or obligations that are due within one year. ...
  6. Book Value

    1. The value at which an asset is carried on a balance sheet. ...
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