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.