ASSET COVERAGE RATIO

A test that determines a company's ability to cover debt obligations with its assets after all liabilities have been satisfied. It is calculated as the following:

When calculating the asset coverage ratio, investors should exercise caution with respect to asset value. Using the book value of assets may result in an inaccurate asset coverage ratio if the actual liquidation value of assets is significantly less. As a rule of thumb, utilities should have an asset coverage ratio of at least 1.5, and industrial companies should have a ratio of at least 2.