Coverage Ratio

coverage ratio - a way to measure the solvency of the company to repay the interest earned on loans.It is calculated as follows: Profit of the company divided by the total amount of debt to be payable (interest on loans and taxes).

extremely low ratio means that the company is not able to take care of the interest payments in the short term, still has a capital reserve for the daily operations or unexpected expenses.

coverage ratio - an excellent method for investors to determine the financial stability of enterprises.Payment of interest on loans for most of them is an extremely important indicator of success.Failure to pay interest on any loan is a sign of weakness, the debt burden, and may be a harbinger of the possible bankruptcy of the business.Sometimes

coverage ratio investment , based on the ratio of interest received, is intended to show how long it takes a company to pay interest.This can be an excellent indicator of short-term financial stability of the organization.

When calculating interest earned for one or another company's earnings before interest and taxes should be summarized.The resulting number is then divided by the total payable, the percentage (of all debts).Both figures are taken for accuracy in accordance with a predetermined period of time for calculations.For example, the company accumulates profit in a certain period of time of 50 000 rubles.This is the amount it earned before taxes and interest paid on loans.In the same period, the interest due is 20 000 rubles.It is necessary to divide the 50,000 (rubles) 20 000 (RUB).The coverage ratio be 2.5, which essentially means the following: the company is able to pay the interest-bearing liabilities by 2.5 times before the end capital.

low ratio of, say, if it is dropped to the base level of 1.0, can be problematic, but it is still the company's profit (before interest and taxes) is enough to repay their interest expense.Below 1.0 indicates that the business is having trouble generating the cash needed to pay interest on loans.Besides that, there are some guidelines, there is no absolute or reference number, which will serve as a benchmark for an acceptable manual.

For companies with unsustainable industries tend to require a higher ratio to the maximum possible control of the potential ups and downs, while in stable industries it may be low.It is not good when a company has at times excessively high interest received.This means that she spent too much of their capital, pay down debt rather than to invest in the development and increase business.

To determine whether a company is in a sufficient amount of liquid assets (excluding slow-moving stocks) for the payment of short-term debt (current liabilities) used sophisticated (or intermediate) ratio cover . Liquid assets include the current reserves, which can quickly be converted to cash close to book value.Companies with a liquidity ratio of less than 1.0 are not able to pay off current debts.

to bondholders coverage ratio, presumably acts as a security tool.It gives an insight into how the company's profit may fall before it fails to meet its payment obligations.For shareholders it is important, because it shows a clear picture of short-term financial health of the business.