# Definition of __Coverage ratios__

## Coverage ratios

**ratios** used to test the adequacy of cash flows generated through earnings for purposes of

meeting debt and lease obligations, including the interest **coverage** ratio and the fixed charge **coverage** ratio.

# Related Terms:

**ratios** that measure how effectively the firm is managing its assets.

A bond indenture restriction that permits additional borrowing on if the ratio of assets to

debt does not fall below a specified minimum.

Also called financial leverage **ratios**, these **ratios** compare debt to total capitalization

and thus reflect the extent to which a corporation is trading on its equity. Capitalization **ratios** can be

interpreted only in the context of the stability of industry and company earnings and cash flow.

The number of times that financial obligations (for interest, principal payments,

preferred stock dividends, and rental payments) are covered by earnings before interest, taxes, rental

payments, and depreciation.

**ratios** that are designed to measure the relative claims of stockholders to earnings

(cash flow per share), and equity (book value per share) of a firm.

A range of payout **ratios** that is typical based on an analysis of comparable firms.

Earnings before interest and income taxes plus one-third rental charges, divided

by interest expense plus one-third rental charges plus the quantity of principal repayments divided by one

minus the tax rate.

Payout **ratios** that are consistent with the availability of excess funds to make

cash dividend payments.

Related: capitalization **ratios**.

A measure of a firm's ability to meet its fixed-charge obligations: the ratio of

(net earnings before taxes plus interest charges paid plus long-term lease payments) to (interest charges paid

plus long-term lease payments).

The ratio of the earnings before interest and taxes to the annual interest expense. This

ratio measures a firm's ability to pay interest.

A debt limitation that prohibits the issuance of additional long-term debt if the issuer's

interest **coverage** would, as a result of the issue, fall below some specified minimum.

Measures of the relative contribution of stockholders and creditors, and of the firm's ability

to pay financing charges. Value of firm's debt to the total value of the firm.

**ratios** that measure a firm's ability to meet its short-term financial obligations on time.

**ratios** that measure a firm's ability to meet its short-term financial obligations on time.

## Market value ratios

**ratios** that relate the market price of the firm's common stock to selected financial

statement items.

## Profitability ratios

**ratios** that focus on the profitability of the firm. Profit margins measure performance

with relation to sales. Rate of return **ratios** measure performance relative to some measure of size of the

investment.

## Rate of return ratios

**ratios** that are designed to measure the profitability of the firm in relation to various

measures of the funds invested in the firm.

## Reserve ratios

Specified percentages of deposits, established by the Federal Reserve Board, that banks must

keep in a non-interest-bearing account at one of the twelve Federal Reserve Banks.

## Short-term solvency ratios

**ratios** used to judge the adequacy of liquid assets for meeting short-term

obligations as they come due, including

1) the current ratio,

2) the acid-test ratio,

3) the inventory turnover ratio, and

4) the accounts receivable turnover ratio.

## profit ratios

**ratios** based on sales revenue for a period. A measure of

profit is divided by sales revenue to compute a profit ratio. For example,

gross margin is divided by sales revenue to compute the gross margin

profit ratio. Dividing bottom-line profit (net income) by sales revenue

gives the profit ratio that is generally called return on sales.

## Fixed Charge Coverage Ratio

A measure of how well a company is able to meet its fixed

charges (interest and lease payments) based on the cash

generated by its operations. It is calculated by dividing the

earnings before interest and taxes by the total interest charges

and lease payments incurred by the firm.

## First To Die Coverage

This means that there are two or more life insured on the same policy but the death benefit is paid out on the first death only. If two or more persons at the same address are purchasing life insurance at the same time, it is wise to compare the cost of this kind of **coverage** with individual policies having a multiple policy discount.

## Last To Die Coverage

This means that there are two or more life insured on the same policy but the death benefit is paid out on the last person to die. The cost of this type of **coverage** is much less than a first to die policy and it is generally used to protect estate value for children where there might be substantial capital gains taxes due upon the death of the last parent. This kind of policy is also valuable when one of two people covered has health problems which would prohibit obtaining individual **coverage**.

## Asset Coverage

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

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