What is Asset Coverage?

The asset coverage ratio is an indicator to measure a company's ability to repay its debt. The formula is: (total assets-current liabilities-short-term loans) ÷ (short-term loans + long-term loans + long-term loans due within one year).

Asset coverage ratio

Right!

The asset coverage ratio is an indicator to measure a company's ability to repay its debt. The formula is: (total assets-current liabilities-short-term loans) ÷ (short-term loans + long-term loans + long-term loans due within one year).

This ratio reflects the multiple relationship between the company's total assets and bank borrowings. In practical applications, the infrastructure industry, such as highways, ports, airports, utilities, and other industries with stable cash flow, has an asset coverage ratio of more than 1.5 times. It can be regarded as healthy, and the asset coverage ratio of industrial enterprises needs to be more than 2 times to qualify. However, this is only an empirical judgment. When analyzing specific industries and companies, investors are better to choose the average value of the specific industry in which the company is located to measure whether the company's asset-liability ratio is qualified. As far as the solvency analysis indicators are concerned, the asset-liability ratio and the net debt ratio are more widely used.