Coverage Ratio
 |
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 Definitions
Articles Of Interest
-
Analyze Investments Quickly With Ratios
Make informed decisions about your investments with these easy equations. -
Why Interest Coverage Matters To Investors
This ratio represents an important factor of shareholders' returns - find out how to analyze it! -
A Clear Look At EBITDA
This measure has its benefits, but it can also present earnings through rose-colored glasses. -
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. -
If You Don't Mind Volatility, Deere Could Still Do Alright
Though Deere's shares sold off after earnings, the business model is sound and rolling along. -
Agilent Isn't Making It Easy On Investors
Core operating performance at Agilent needs to improve -
Consumer Spending As A Market Indicator
What people buy and where they shop can provide valuable information about the economy. -
Depreciation: Straight-Line Vs. Double-Declining Methods
Appreciate the different methods used to describe how book value is "used up". -
Overheated Expectations Send Rackspace Investors To The Torture Chamber
Absent a real competitive moat, it's hard to make sense of Rackspace's valuation. -
Mondelez Isn't As Good As Nestle, But Priced Like It Is
Investors seem to bullish on Mondelez, given the relative performance at Kellogg and Nestle.
