What is Asset Coverage?
Asset coverage has to do with the ratio between the tangible assets that are in hand and the amount of money that is owed in the way of loans, and other debts to vendor partners, preferred stock holders, and others. When discussing the current level of asset coverage, the point is to determine how much of the net assets of the company would be necessary to cover the current outstanding indebtedness of the business. The process for calculating asset coverage is very simple. First, determine the sum of the equity in the business and the non-current liabilities that are held by the company. Divide this figure by the value of non-current assets. The answer will be the current rate of asset coverage, as calculated into a percentage. In some instances, the value of inventories may also be bundled in with the value of the non-current assets as part of the final calculation. Keeping a close watch on asset coverage is a smart move for businesses of all sizes. While it is virtually impossible to
Asset Coverage – A company’s net assets covering a debt. The concept becomes important when a company goes into liquidation. From the total book value of the assets are deducted the claims of creditors, and the ratio of what remains to the total number of preference shares represents the asset coverage for such shares. The asset coverage for equity shares is the ratio obtained after deducting all creditor’s dues and the value of he preference shares, divided by the number of equity shares. The result is also called the net book value of equity shares.
