Asset Coverage Ratio
So, you just took out a second loan on your home and pledged it to buy that cabin in the woods you can't afford? Your debt now exceeds your assets. Oops. That's a simple, yet important example of a crappy asset coverage ratio.
Now let's apply that to business. When you take out a company loan, your bank will want to know your asset coverage ratio to make sure you can afford that loan. An asset coverage ratio is used to figure out how your assets stack up to your debts. The higher the ratio, the better. The formula for asset coverage ratio is as follows: (Total Assets-Intangible Assets) - (Current Liabilities-Short Term Debt)/Total Debt Obligations. An asset is something the company owns that carries tangible value-like patents, 1400 acres of fully leased server farm, distribution networks with 6,000 bars, $14 million in cash in a Wells Fargo account, etc. All of those are assets that banks will go after, should you default on your promise to pay them back the money you borrowed.
Related or Semi-related Video
Finance: What is a Consolidated Balance ...3 Views
Finance a la shmoop what is a consolidated balance sheet? okay people
this is a tale of two balance sheets it was the best of times right here and all [Lemonade stand balance sheet appears]
that cash no debt,, yeah and it was the worst of times and pretty much the
opposite and then one magical mergy day the two companies possessing these
two divergent balance sheets decided to you know merge it was a lovely ceremony [Bride and groom holding hands]
the bride wore white the groom stepped on the glass so then the balance sheets
were consolidated that is they were merged or combined or fully brought
together liabilities plus liabilities assets plus assets so the few dollars in
cash here in the worst of times balance sheet
well that was tacked on to the cash in the best of times balance sheet and the
same happened with long term liabilities and short and eventually after the
wedding night was you know consummated these two balance sheets had merged and [Man and girl standing by their lemonade stands]
consolidated and looked like this and that's what happens when companies merge
everything including their balance sheets consolidate let's hope they
generate lots of tiny cash flows and credits in the future....Mazel Tov
Up Next
Inventory turnover...way less delicious than an apple turnover. So...what is it?
Work-in-process inventory is just inventory... that is in the process of being built. In other words, it accounts for the inventory's asset value.
How is inventory managed for cash flow purposes? In order to avoid the cost of carrying slow moving or out of favor inventory that would take space...
What is the loan-to-value ratio? Loan us some of your time and watch this handy video.