Answers the Question
Can we afford our debt after paying off our liabilities?
Calculator for Asset Coverage Ratio
What Is the Asset Coverage Ratio?
The asset coverage ratio is a measure of how easily a firm can pay off its outstanding debts.
Why Is it Important?
- Lenders will use this and other measures to determine the creditworthiness of a firm before extending further credit.
- Managers will, in general, find it worthwhile to keep this measure low. The more solvent the firm, the more money it will have to devote to profitable ventures.
Formula(s) to Calculate Asset Coverage Ratio
- ASSET COVERAGE RATIO = ((TOTAL ASSETS - INTANGIBLE ASSETS) - (TOTAL CURRENT LIABILITIES - SHORT TERM DEBT)) / TOTAL DEBT
- This measure will not count intangible assets, even though such considerations are increasingly the basis for many firm's value.
- Assets that are included in the formula may be worth significantly less that the value assumed by the formula.