Coverage Ratio

AAA

DEFINITION of 'Coverage Ratio'

A measure of a company's ability to meet its financial obligations. In broad terms, the higher the coverage ratio, the better the ability of the enterprise to fulfill its obligations to its lenders. The trend of coverage ratios over time is also studied by analysts and investors to ascertain the change in a company's financial position. Common coverage ratios include the interest coverage ratio, debt service coverage ratio and the asset coverage ratio.

INVESTOPEDIA EXPLAINS 'Coverage Ratio'

While comparison of coverage ratios of companies in the same industry or sector will provide valuable insights into their relative financial positions, comparing ratios across companies in different sectors will not prove as useful, since it may be tantamount to comparing apples and oranges.


For example, the interest coverage ratio measures the ability of a company to pay the interest expense on its debt. An energy producer may have an interest coverage ratio of 5, while a utility may have a coverage ratio of 4. This does not automatically imply that the energy producer is more solvent than the utility, since the energy producer may have greater volatility in its earnings and cash flows than the utility, due to fluctuations in oil and gas prices. As well, if the energy company's peers have an average interest coverage ratio of 7, while the utility's peers have an average coverage ratio of 3, the utility may actually be in better shape than the energy producer, especially in relation to their respective peers.

RELATED TERMS
  1. Times Interest Earned - TIE

    A metric used to measure a company's ability to meet its debt ...
  2. Cash Available For Debt Service ...

    A ratio that measures the amount of cash a company has on hand ...
  3. Fixed-Charge Coverage Ratio

    A ratio that indicates a firm's ability to satisfy fixed financing ...
  4. Asset Coverage Ratio

    A test that determines a company's ability to cover debt obligations ...
  5. Interest Coverage Ratio

    A ratio used to determine how easily a company can pay interest ...
  6. Debt-Service Coverage Ratio - DSCR

    In corporate finance, it is the amount of cash flow available ...
Related Articles
  1. 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.
  2. Investing Basics

    Analyze Investments Quickly With Ratios

    Make informed decisions about your investments with these easy equations.
  3. Markets

    A Clear Look At EBITDA

    This measure has its benefits, but it can also present earnings through rose-colored glasses.
  4. Bonds & Fixed Income

    Why Interest Coverage Matters To Investors

    This ratio represents an important factor of shareholders' returns - find out how to analyze it!
  5. Investing

    What's a Debit Note?

    A debit note is a document used by a seller to inform a purchaser of a dollar amount owed. As the name indicates, it is a note from the seller that a debit has been made to the purchaser’s account. ...
  6. Fundamental Analysis

    Efficiency Ratio

    There are many types of efficiency ratios, but all measure how well a company utilizes its resources to make a profit. Business managers use these ratios to determine how well they are operating ...
  7. Investing Basics

    What is Profit?

    Profit is a general term used to denote when earnings exceed the expenses incurred to generate those earnings.
  8. Investing

    What's Capitalization?

    Capitalization has different meanings depending on the context.
  9. Investing

    Deferred Tax Liability

    Deferred tax liability is a tax that has been assessed or is due for the current period, but has not yet been paid. The deferral arises because of timing differences between the accrual of the ...
  10. Charts & Patterns

    Why These Are 2015's Most-Promising Bank Stocks

    Which bank stocks should offer the best bang for your buck in 2015? Possibly these, so read on.

You May Also Like

Hot Definitions
  1. Fixed Cost

    A cost that does not change with an increase or decrease in the amount of goods or services produced. Fixed costs are expenses ...
  2. Subsidy

    A benefit given by the government to groups or individuals usually in the form of a cash payment or tax reduction. The subsidy ...
  3. Sunk Cost

    A cost that has already been incurred and thus cannot be recovered. A sunk cost differs from other, future costs that a business ...
  4. Technical Skills

    1. The knowledge and abilities needed to accomplish mathematical, engineering, scientific or computer-related duties, as ...
  5. Prepaid Expense

    A type of asset that arises on a balance sheet as a result of business making payments for goods and services to be received ...
  6. Gordon Growth Model

    A model for determining the intrinsic value of a stock, based on a future series of dividends that grow at a constant rate. ...
Trading Center