What is Asset Coverage ?

Asset Coverage is a term used to define the extent to which a company can continue with its operations at its level of debt. The asset coverage ratio is one of the most common ways to measure asset coverage. In this ratio, the value of tangible assets is divided less current liabilities by the company’s total debt outstanding. Preferred liabilities and rent may be included in these liabilities. The asset coverage ratio is calculated as the following:

= (BV Total Assets – Intangible Assets) – (Current Liabilities –ST Debt Obligations) / Total Debt Outstanding

Where BV stands for Book Value and ST stands for Short Term

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Using the book value of assets while calculating the asset coverage ratio may result in an inaccurate asset coverage ratio if the actual liquidation value of assets is significantly less. Hence, investors should be careful with respect to the asset value.  It is preferable for utilities to have an asset coverage ratio of at least 1.5 and industrial companies should have a ratio of at least 2.

Edited and Updated 31st May 2014

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