Asset coverage is a financial ratio used to evaluate a company’s ability to meet its debt obligations using its assets. It compares the value of the company’s assets—after subtracting liabilities that rank ahead of the debt being analyzed—to the amount of debt that needs to be covered.
This ratio is commonly used for companies that issue bonds, take on long-term loans, or operate with significant leverage. It helps lenders and investors understand the level of protection they have if a company faces financial stress. Higher asset coverage indicates stronger protection, while low coverage suggests increased financial risk.
Companies with capital-intensive operations, such as utilities, industrials, or transportation businesses, often monitor asset coverage closely because their borrowing levels tend to be higher. Rating agencies and debt investors also rely on this metric when assessing creditworthiness.
Asset coverage helps investors and creditors evaluate how safely a company can repay its debt. A strong asset coverage ratio reduces risk and supports better financing terms, while a weak ratio signals potential financial pressure.
Asset coverage is calculated by subtracting senior liabilities from total assets and dividing the result by the amount of debt being evaluated. The formula shows how many times the assets can cover that debt.
Bond investors use asset coverage to assess repayment safety. A higher ratio means the company has more asset value available to support its outstanding debt.
A company has $500 million in assets and $350 million in higher-priority liabilities. This leaves $150 million available to cover its $100 million bond issue, giving an asset coverage ratio of 1.5.
