The Asset Coverage Ratio is a financial metric used to determine how well a company can cover its debt obligations with its assets, after accounting for intangible assets and certain liabilities. This ratio is particularly relevant for creditors and investors as it provides insight into the company’s financial stability and risk level. A higher ratio indicates that a company has more than enough assets to cover its debts, implying lower financial risk. Conversely, a lower ratio suggests higher risk, as the company may struggle to meet its debt obligations if its income sources decline.
This page covers the following topics related to Asset Coverage Ratio:
General Formula
- Total Assets: Sum of all the assets owned by the company
- Intangible Assets: Non-physical assets like patents, trademarks, and goodwill
- Current Liabilities: Short-term obligations due within a year
- Short-term Debt: Portion of current liabilities that consists of financial debt
- Total Debt: Sum of all the company’s financial debts, short and long-term
The Asset Coverage Ratio focuses on a company’s ability to settle its financial debts using its physical assets. Intangible assets are typically subtracted because they cannot be easily liquidated. This ratio is a critical measure for assessing the financial health of capital-intensive industries where companies have significant physical assets.
Application in Excel
To calculate the Asset Coverage Ratio in Excel, you would typically gather the necessary financial data and input them into designated cells. In the example below, the Asset Coverage Ratio could be calculated as follows:
=((B11-B9)-(B16-B15))/B19
This ratio allows financial analysts and investors to evaluate the long-term financial stability and debt-paying ability of a company.
Related Topics
Disclaimer: The information provided on this website is for educational purposes only and is not intended for use as legal, financial, or tax advice. While every effort is made to ensure the accuracy and reliability of the content, Maths for Finance makes no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the website or the information, products, services, or related graphics contained on the website for any purpose. Any reliance you place on such information is therefore strictly at your own risk. In no event will Maths for Finance be liable for any loss or damage including without limitation, indirect or consequential loss or damage, or any loss or damage whatsoever arising from loss of data or profits arising out of, or in connection with, the use of this website. Please further review our Terms of Service.
Maths for Finance 