Business Glossary

extent to which a company's net assets cover a particular debt obligation, class of preferred stock, or equity position.

Asset coverage is calculated as follows: from assets at their total book value or liquidation value, subtract intangible assets, current liabilities, and all obligations prior in claim to the issue in question. Divide the result by the dollar amount of the subject issue (or loan) to arrive at the asset coverage ratio. The same information can be expressed as a percentage or, by using units as the divisor, as a dollar figure of coverage per unit. The variation to determine preferred stock coverage treats all liabilities as paid; the variation to arrive at common stock coverage considers both preferred stock and liabilities paid. The term most often used for the common stock calculation is net book value per share of common stock.

These calculations reveal direct asset coverage. Overall asset coverage is obtained by including the subject issue with the total of prior obligations and dividing the aggregate into total tangible assets at liquidating value.

Asset coverage is important as a cushion against losses in the event of liquidation.

measure of an organization's solvency or its ability to pay back bank debt and other credit obligations from earnings, usually expressed as a ratio of balance sheet assets to long-term debt. The ratio of assets to long-term debt is computed by dividing total assets (less intangible assets, current liabilities, and existing senior debt) by the total debt being considered. The result can be expressed as a ratio, a percentage, or in dollar terms. Also called debt service ratio.