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. Intangible Asset

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

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

    A company's debts or obligations that are due within one year. ...
  4. Net Liquid Assets

    A measure that examines a company's net liquid financial assets. ...
  5. Coverage Ratio

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

    1. A resource with economic value that an individual, corporation ...
RELATED FAQS
  1. What happens to the company stock if a subsidiary gets spun off?

    When a subsidiary gets spun off, the company's stock tends to drop. However, the investor in the stock does not lose any ... Read Full Answer >>
  2. What Book Value Of Equity Per Share (BVPS) ratio indicates a buy signal?

    Book value of equity per share (BVPS) is a ratio used in fundamental analysis to compare the amount of a company's shareholders' ... Read Full Answer >>
  3. Does stockholders equity accurately reflect a company's worth?

    Stockholders' equity is one method to evaluate a company's worth. It tends to work better for companies in established industries ... Read Full Answer >>
  4. What are some tactics businesses can use to increase unlevered free cash flow?

    Unlevered free cash flow is defined as earnings before interest taxes, depreciation and amortization (EBITDA) less capital ... Read Full Answer >>
  5. What level of annual growth is common for companies in the Internet sector?

    The Internet services sector consists of a diverse group of companies that exhibit strong growth potential. Investors often ... Read Full Answer >>
  6. What are common growth rates that should be analyzed when considering the future ...

    Some of the most common growth rate metrics that investors and analysts consider in evaluating a company's future prospects ... 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

    Are Fast-Casual Restaurants Overvalued?

    Can fast-casual restaurants actually grow to the levels that investors believe they can?
  6. Entrepreneurship

    Samsung and Google: A Beautiful Friendship?

    Google and Samsung have more than a hardware/software relationship. These two technology giants have collaborated time and again to define mobile's future.
  7. Personal Finance

    How The NFL Makes Money

    The National Football League is the most successful sports league in the world. How does the NFL make money, and what is its strategy to stay on top?
  8. Personal Finance

    Major League Baseball's Business Model & Strategy

    Major League Baseball is big business. Let's take a look at where the money comes from.
  9. Investing Basics

    5 Things Investors Can Learn From Shark Tank

    Retail investors can watch "Shark Tank" to learn how the wealthy analyze investment opportunities.
  10. Investing

    What’s Driving Markets Today

    While U.S. stocks managed to eke out modest gains last week, it wasn’t without some violent swings along the way.

You May Also Like

Hot Definitions
  1. Bund

    A bond issued by Germany's federal government, or the German word for "bond." Bunds are the German equivalent of U.S. Treasury ...
  2. European Central Bank - ECB

    The central bank responsible for the monetary system of the European Union (EU) and the euro currency. The bank was formed ...
  3. Quantitative Easing

    An unconventional monetary policy in which a central bank purchases private sector financial assets in order to lower interest ...
  4. Current Account Deficit

    A measurement of a country’s trade in which the value of goods and services it imports exceeds the value of goods and services ...
  5. International Monetary Fund - IMF

    An international organization created for the purpose of: 1. Promoting global monetary and exchange stability. 2. Facilitating ...
  6. Risk-Return Tradeoff

    The principle that potential return rises with an increase in risk. Low levels of uncertainty (low-risk) are associated with ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!