Coverage Ratios
Determine a company’s ability to pay its financial obligations. A higher ratio indicates a greater ability of the company to meet its financial obligations while a lower ratio indicates a lesser ability.
Interest Coverage Ratio
– Determine how well a company can pay the interest on its outstanding debts. As well as determining the riskiness of lending capital to a company.
– Interest Coverage Ratio: Earnings before interest and taxes (EBIT) / Interest Expense
Debt Service Coverage Ratio
– Measures the ability of a company to use its operating income to repay all its debt obligations, including repayment of principal and interest on both short- term and long-term debt.
– Debt Service Coverage Ratio: Net income / (Principle repayments + Interest expense)
Asset Coverage Ratio
– Helps to determine a company’s long-term profit potential
– Asset Coverage Ratio: [(Total assets – Intangible assets) – (Current liabilities – short term debt obligations)] / Total debt outstanding
Leverage Ratios
Debt to Equity Ratio
– Indicates how much debt a company is using to finance its assets relative to the value of the equity.
– Debt to Equity Ratio: Total Liabilities / Total Shareholder’s Equity
Debt Ratio
– The portion of a company’s assets that are financed by debt
– Debt Ratio: Total Debt / Total Assets
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