Coverage ratios focus on a companyâ€™s ability to manage its debt, while the levered free cash flow to enterprise value ratio is primarily a leverage or equity multiplier valuation. There is not one specific coverage ratio, but several. It is important for investors to be able to determine if a company has a level of debt that exceeds a safe amount and is potentially problematic. It is a normal practice for a business to use debt as a means of financing operations, but if a company utilizes too much debt, it may find it difficult to manage the debt load. Coverage ratios enable investors and analysts to determine how capable a company is of covering its debt obligations. A higher coverage ratio means a company has a greater ability to manage and pay off its outstanding debt. Coverage ratios with the most widespread use include the asset coverage ratio, the interest coverage ratio and the debtservice coverage ratio.
The asset coverage ratio provides investors with the ability to understand a companyâ€™s potential to generate sufficient profit from its existing assets to cover its debt. The idea behind this ratio is that a company with more assets than total borrowings is more likely to pay off its obligations at a future time. The asset coverage ratio subtracts a companyâ€™s nearterm liabilities from its tangible assets, and then divides the total by the companyâ€™s debt.
The interest coverage ratio divides a companyâ€™s earnings before interest and taxes, or EBIT, by its interest expenses for the same time period. A general rule for investors and analysts is that a company's interest coverage ratio should be 1.5 or higher. Lower ratios are an indication a company may be having difficulty servicing its debt.
The debtservice coverage ratio makes up for a flaw in the interest coverage ratio; it does not take into account that businesses must pay down on principal quarterly. The formula for the debtservice ratio is the companyâ€™s net income divided by the total cost of its principal repayments plus interest expenses. Investors prefer debtservice ratios higher than the minimum acceptable level of 1.
The levered free cash flow to enterprise value ratio, or LFCF/EV, is a different type of valuation metric, commonly used to identify undervalued companies. These are companies with a levered free cash flow amount greater than the enterprise value of the company, resulting in a higher ratio. The LFCF/EV is a combination of two parts, levered free cash flow and enterprise value.
Levered free cash flow is free cash flow available once the interest on outstanding debt is paid. This number is significant because it is not a figure that can be easily manipulated on a companyâ€™s financial statements. Enterprise value is the total value of a company, including all sources of ownership, such as preferred shares, debt outstanding and market capitalization. The final figure subtracts cash holdings. The comparison of free cash flow to enterprise value provides an alternative valuation of a company that can then be compared to the company's valuation by market capitalization or other basic fundamental valuation metrics.

What is a bad interest coverage ratio?
Understand how interest coverage ratio is calculated and what it signifies, and learn what market analysts consider to be ... Read Answer >> 
What is the difference between interest coverage ratio and TIE?
Read about the times interest earned, also known as the interest coverage ratio. Find out why this is an important ratio ... Read Answer >> 
How does the International Monetary Fund function?
Learn how expenditures and distributions affect the fixed charge coverage ratio, and how this ratio is used to evaluate a ... Read Answer >> 
If a company has a high debt to capital ratio, what else should I look at before ...
Learn about some of the financial leverage and profitability ratios that investors can analyze to supplement examining the ... Read Answer >> 
What is the difference between interest coverage ratio and DSCR?
Understand the basics of the interest coverage ratio and the debtservice coverage ratio, including calculations and how ... Read Answer >> 
What's the difference between the coverage ratio and the liquidity coverage ratio?
Understand the difference between coverage ratios and the liquidity coverage ratio and why the liquidity coverage ratio rule ... Read Answer >>

Investing
An Introduction to Coverage Ratios
Interest coverage ratios help determine a company's ability to pay down its debt. 
Investing
Analyzing WalMart's Debt Ratios in 2016 (WMT)
Analyze WalMart's debttoequity ratio, interest coverage ratio and cash flowtodebt ratio to evaluate the company's financial health and debt management. 
Investing
Understanding Leverage Ratios
Large amounts of debt can cause businesses to become less competitive and, in some cases, lead to default. To lower their risk, investors use a variety of leverage ratios  including the debt, ... 
Investing
Analyzing IBM's Debt Ratios in 2016 (IBM)
Look over the debt ratios for the IBM Corporation, such as its debttoequity ratio, its interest coverage ratio and its cash flow to debt ratio. 
Investing
Analyzing Comcast's Debt Ratios in 2016 (CMCSA)
Evaluate Comcast's most important debt ratios, and determine whether the company is using debt responsibly and capable of meeting obligations. 
Investing
Analyzing Verizon's Debt Ratios in 2016 (VZ)
Analyze Verizon's key debt ratios, and understand how the company has been able to expand in recent years by safely increasing its debt load.

Asset Coverage Ratio
A test that determines a company's ability to cover debt obligations ... 
Levered Free Cash Flow
The free cash flow that remains after a company has paid its ... 
Liquidity Ratios
A class of financial metrics that is used to determine a company's ... 
Long Term Debt To Total Assets Ratio
A measurement representing the percentage of a corporation's ... 
Cash Ratio
The ratio of a company's total cash and cash equivalents to its ... 
EBITDAToInterest Coverage Ratio
A ratio that is used to assess a company's financial durability ...