Coverage Ratio

What Does Coverage Ratio Mean?
An accounting ratio that helps measure a company's ability to meet its obligations satisfactorily.
Investopedia explains Coverage Ratio

A coverage ratio encompasses many different types of financial ratios. Typically, these kinds of
ratios involve a comparison of assets and liabilities. The better the assets "cover" the liabilities,
the better off the company is.
What Does Asset Coverage Ratio Mean?

A test that determines a company's ability to cover debt obligations with its assets after all
liabilities have been satisfied. It is calculated as the following:
Investopedia explains Asset Coverage Ratio

When calculating the asset coverage ratio, investors should exercise caution with respect to
asset value. Using the book value of assets may result in an inaccurate asset coverage ratio if the
actual liquidation value of assets is significantly less. As a rule of thumb, utilities should have an
asset coverage ratio of at least 1.5, and industrial companies should have a ratio of at least 2.
What Does Fixed-Charge Coverage Ratio Mean?

A ratio that indicates a firm's ability to satisfy fixed financing expenses, such as interest and
leases. It is calculated as the following:
Investopedia explains Fixed-Charge Coverage Ratio

For example, since leases are a fixed charge, the calculation determining a company's ability
leases would be (EBIT + Lease Expenses) / (Lease Expenses + Interest).
What Does Gearing Ratio Mean?

A general term describing a financial ratio that compares some form of owner's equity (or capital)
to borrowed funds. Gearing is a measure of financial leverage, demonstrating the degree to which
a firm's activities are funded by owner's funds versus creditor's funds.
Also known as the Net Gearing Ratio.
Investopedia explains Gearing Ratio

The higher a company's degree of leverage, the more the company is considered risky. As for
most ratios, an acceptable level is determined by its comparison to ratios of companies in the
same industry. The best known examples of gearing ratios include the debt-to-equity ratio (total
debt / total equity), times interest earned (EBIT / total interest), equity ratio (equity / assets), and
debt ratio (total debt / total assets).
A company with high gearing (high leverage) is more vulnerable to downturns in the business
cycle because the company must continue to service its debt regardless of how bad sales are. A
greater proportion of equity provides a cushion and is seen as a measure of financial strength.
What Does Interest Coverage Ratio Mean?
A ratio used to determine how easily a company can pay interest on outstanding debt. The
interest coverage ratio is calculated by dividing a company's earnings before interest and taxes
(EBIT) of one period by the company's interest expenses of the same period:
Investopedia explains Interest Coverage Ratio

The lower the ratio, the more the company is burdened by debt expense. When a company's
interest coverage ratio is 1.5 or lower, its ability to meet interest expenses may be questionable.
An interest coverage ratio below 1 indicates the company is not generating sufficient revenues to
satisfy interest expenses.
Earnings Before Interest & Tax - EBIT
What Does Earnings Before Interest & Tax - EBIT Mean?

An indicator of a company's profitability, calculated as revenue minus expenses, excluding tax
and interest. EBIT is also referred to as "operating earnings", "operating profit" and "operating
income", as you can re-arrange the formula to be calculated as follows:
EBIT = Revenue - Operating Expenses
Also known as Profit Before Interest & Taxes (PBIT), and equals Net Income with interest and
taxes added back to it.
Investopedia explains Earnings Before Interest & Tax - EBIT

In other words, EBIT is all profits before taking into account interest payments and income
taxes. An important factor contributing to the widespread use of EBIT is the way in which it nulls
the effects of the different capital structures and tax rates used by different companies. By
excluding both taxes and interest expenses, the figure hones in on the company's ability to profit
and thus makes for easier cross-company comparisons.
EBIT was the precursor to the EBITDA calculation, which takes the process further by removing
two non-cash items from the equation (depreciation and amortization).
Earnings Before Interest, Taxes, Depreciation and

Amortization - EBITDA
What Does Earnings Before Interest, Taxes, Depreciation and Amortization - EBITDA
Mean?
An indicator of a company's financial performance which is calculated in the following EBITDA
calculation:
EBITDA is essentially net income with interest, taxes, depreciation, and amortization added back
to it, and can be used to analyze and compare profitability between companies and industries
because it eliminates the effects of financing and accounting decisions.
Investopedia explains Earnings Before Interest, Taxes, Depreciation and Amortization -

EBITDA
This is a non-GAAP measure that allows a greater amount of discretion as to what is (and is
not) included in the calculation. This also means that companies often change the items included
in their EBITDA calculation from one reporting period to the next.
EBITDA first came into common use with leveraged buyouts in the 1980s, when it was used to
indicate the ability of a company to service debt. As time passed, it became popular in industries
with expensive assets that had to be written down over long periods of time. EBITDA is now
commonly quoted by many companies, especially in the tech sector - even when it isn't
warranted.
A common misconception is that EBITDA represents cash earnings. EBITDA is a good metric to
evaluate profitability, but not cash flow. EBITDA also leaves out the cash required to fund working
capital and the replacement of old equipment, which can be significant. Consequently, EBITDA
is often used as an accounting gimmick to dress up a company's earnings. When using this
metric, it's key that investors also focus on other performance measures to make sure the
company is not trying to hide something with EBITDA.
EBITDA-To-Interest Coverage Ratio
What Does EBITDA-To-Interest Coverage Ratio Mean?

A ratio that is used to assess a company's financial durability by examining whether it is at least
profitably enough to pay off its interest expenses. A ratio greater than 1 indicates that the
company has more than enough interest coverage to pay off its interest expenses.
The ratio is calculated as follows:
Also known as EBITDA Coverage.
Investopedia explains EBITDA-To-Interest Coverage Ratio

This ratio was first widely used by leveraged buyout bankers, who would use it as a first screen to
determine whether a newly restructured company would be able to service its short-term debt
obligations.
While this ratio is a very easy way to assess whether a company can cover its interest-related
expenses, the applications of this ratio are also limited by the relevance of using EBITDA as a
proxy for various financial figures.
For example, suppose that a company has an EBITDA-to-interest coverage ratio of 1.25; this may
not mean that it would be able to cover its interest payments, because the company might need
to spend a large portion of its profits on replacing old equipment. Because EBITDA does not
account for depreciation-related expenses, a ratio of 1.25 might not be a definitive indicator of
financial durability.
Coverage Ratio
Any ratio measuring one's ability to pay a certain expense. There are various kinds of coverage
ratio. For example, one may take a ratio of a company's monthly cash flow to its monthly debt
service. Generally speaking, a coverage ratio at or above 1 indicates that a company can pay the
stated expense, while a ratio below 1 indicates the opposite.
Price-To-Sales Ratio - Price/Sales
What Does Price-To-Sales Ratio - Price/Sales Mean?

A ratio for valuing a stock relative to its own past performance, other companies or the market
itself. Price to sales is calculated by dividing a stock's current price by its revenue per share for
the trailing 12 months:
The ratio can also be referred to as a stock's "PSR".
Investopedia explains Price-To-Sales Ratio - Price/Sales

The price-to-sales ratio can vary substantially across industries; therefore, it's useful mainly when
comparing similar companies. Because it doesn't take any expenses or debt into account, the
ratio is somewhat limited in the story it tells.
Investors are always seeking ways to compare the value of stocks. The price-to-sales
ratio (Price/Sales or P/S) provides a simple approach: take the company's market capitalization
(the number of shares multiplied by the share price) and divide it by the company's total sales
over the past 12 months. The lower the ratio, the more attractive the investment. As easy as it
sounds, price-to-sales provides a useful measure for sizing up stocks. But investors need to be
mindful of the ratio's potential pitfalls and possible unreliability

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What Does Coverage Ratio Mean?

Investopedia explains Coverage Ratio

What Does Asset Coverage Ratio Mean?

Investopedia explains Asset Coverage Ratio

What Does Fixed-Charge Coverage Ratio Mean?

Investopedia explains Fixed-Charge Coverage Ratio

What Does Gearing Ratio Mean?

Also known as the Net Gearing Ratio.

Investopedia explains Gearing Ratio

Investopedia explains Interest Coverage Ratio

Earnings Before Interest & Tax - EBIT

What Does Earnings Before Interest & Tax - EBIT Mean?

EBIT = Revenue - Operating Expenses

Investopedia explains Earnings Before Interest & Tax - EBIT

Earnings Before Interest, Taxes, Depreciation and

Investopedia explains Earnings Before Interest, Taxes, Depreciation and Amortization -

EBITDA-To-Interest Coverage Ratio

What Does EBITDA-To-Interest Coverage Ratio Mean?

The ratio is calculated as follows:

Also known as EBITDA Coverage.

Investopedia explains EBITDA-To-Interest Coverage Ratio

Price-To-Sales Ratio - Price/Sales

What Does Price-To-Sales Ratio - Price/Sales Mean?

The ratio can also be referred to as a stock's "PSR".

Investopedia explains Price-To-Sales Ratio - Price/Sales

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