What is the coverage ratio?
The ratio of coverage is designed to determine the ability of the company to pay one of its financial obligations in terms of the cash flow it creates. There are several different ratios, including those concerning interest, fixed fees and total debt-all designed to measure the short-term power of society. Generally, the coverage ratio is calculated by the company's income and the division of this number by a specific costs. If the ratio is more than 1, it means that the company can repay costs with its profits and there is money left, while the number lower than 1 suggests that it does not have enough money to satisfy this financial demand.
When attempting to measure financial solvency, the ratio of coverage is an accurate indicator of how well the company is doing, at least in the short term. Simply put, these conditions measure whether the company can pay its accounts. Inability probably means that society is fighting and could be aware of collapse. The ratios of fixed coverage generally indicate financial power.
Interest coverage ratio, also known as Times herethed, is obtained by the company's income before interest and taxes and the distribution of the amount of interest owed to creditors. Imagine, for example, that the company has earned $ 5,000 in the US (USD) in a specific period of time and owes $ 4,000 in interest payments for the same period. $ 5,000 is divided by $ 4,000, which comes for time interest earned $ 1.25. This basically means that society can cover its interest payments and still have 25 percent of its original profits.
In a similar way, other ratios can be calculated. For example, the debt service ratio takes into account interest and payment payments, while the fixed charge ratio includes fixed fees of the company, such as rent. Whenever one of these conditions is less than 1, it can be said with certainty that society is in danger of becoming insolvency.
different industrialThe sectors have different standards for what is a solid coverage ratio, depending on the volatile substance of the industry. It is best to compare businesses with others in the same industry to get a real picture of how their conditions will last. One of the other warnings is that an extremely high ratio is not necessarily positive for the company. This could indicate that the company eliminates its debt too quickly and loses money that could be used for further investment to grow business.