Examples of coverage ratios definition

Ideally, this ratio should be greater than 1. Based on the types of these ratios, the formula differs. In this case, the ratio analysis depicts that the firm is in a comfortable position at the moment to pay off its debt using its earnings or asset. Bharti Airtel is a highly debt-ridden Indian telecom company because of the high CapEx requirements in this industry.

Source: Annual Reports and www.

Examples of coverage ratios definition: The common coverage ratios are the

As observed, these ratios are going down. It is because its debt has increased over the years, and EBIT has gone down. It happened because of the margin pressure and the entry of Reliance Jio into the market. If this continues in the future, Bharti Airtel could be in a bad position. As a result of this, it has to sell off its assets to repay the loan.

There are various coverage ratios.

Examples of coverage ratios definition: A coverage ratio measures the ability

Firstly, the interest ratio is calculated by dividing EBIT by interest payment. Secondly, the debt service ratio is calculated by dividing operating income by total debt. These establish the capacity of a company to pay off its liabilities and obligations, such as debt, interest, cash requirements, etc. A higher ratio means the company earns a good portion of its revenue and can efficiently pay off its liabilities and obligations.

Most organizations should aim for a cash flow ratio of at least 1. A high coverage ratio indicates that it's likely the company will be able to make all its future interest payments and meet all its financial obligations. Analysts and investors may study any changes in a company's coverage ratio over time to assess the company's financial position.

Investors can use coverage ratios in many different ways. A coverage ratio can be used to help identify companies in a potentially troubled financial situation. While a high coverage ratio is one indication that a company is likely to meet all its financial obligations, a low ratio does not always indicate that a company is experiencing financial difficulty.

A deeper dive into a company's financial statements is often recommended to get a better sense of a business's health. Coverage ratios are also valuable when looking at a company in relation to its competitors. Comparing the coverage ratios of companies in the same industry or sector can provide valuable insights into their relative financial positions.

There are different types of coverage ratios. Common coverage ratios include the interest coverage ratio, debt service coverage ratio, and asset coverage ratio. The interest coverage ratio measures the ability of a company to pay the interest expenses on its debt. The interest coverage ratio—also called the times interest earned TIE ratio—is defined as:.

An interest coverage ratio of two or higher is generally considered satisfactory. The debt service coverage ratio DSCR measures how well a company is able to pay its entire debt service. Understanding coverage ratios is crucial for making informed financial decisions. These ratios help evaluate the likelihood that a company can maintain its debt payments without incurring further liabilities or risks.

Examples of coverage ratios definition: The most common coverage ratios

Industry Comparison : Coverage ratios will vary widely between industries. A utility company typically has higher fixed costs and predictable income, resulting in different ratios compared to a tech startup. Coverage ratios have long been a fundamental aspect of financial analysis. Therefore, coverage ratios can be best described as a metric that intends to measure the ability of the company to proceed with the smooth functioning of debts, in addition to the associated interest payments or dividends.

Coverage Ratio is a broader term that encapsulates several different ratios that creditors and lenders use to ensure that they can properly estimate the financial standing and the subsequent credit standing of the companies. It only focuses on the component of interest, and therefore, it solely gauges the ability of the company to meet its interest-based expenses associated with debt.

Examples of coverage ratios definition: A coverage ratio is

This captures the number of times the company can pay its interest expense on debt with its current level of operating income. In this regard, it can be seen that there is a general benchmark, of an Interest Coverage Ratio of 1. Before an Interest Coverage Ratio of 1.