This asset coverage ratio calculator estimates how much of the assets of a company will be required to cover its financial obligations, thus it measures its position against its outstanding debts. The ACR formula together with some more information on this topic can be found below the form.
How does this asset coverage ratio calculator work?
The algorithm behind this asset coverage ratio calculator applies the most often used formula by financials experts that considers these variables:
Total assets (TA)
Intangible assets (IA)
Current liabilities (CL)
Short term debt (STD)
Total debt obligations (TDO)
Asset coverage ratio formula (ACR) = ((TA - IA) – (CL – STD)) / TDO
The interpretation of the asset coverage ratio level
Since it indicates the ability of a company to cover its outstanding debts with its assets, this ratioallows financial experts and investors to assess the insolvency risk associated with the business.
The limitation it has is that in case the book assets value is significantly different than the market value of the assets it may lead to inaccurate results.
In regard of its optimal level, there are no certain rules as it may vary depending on the industry the company operates in. However, some recommend that industrial and publicly held entities should try to ensure an asset coverage ratio around 2, while in case of utilities companies this optimal limit is considered around 1.5.
Example of a calculation
In case of a company with this status:
Total assets = $500,000
Intangible assets = $100,000
Current liabilities = $120,000
Short term debt = $30,000
Total debt obligations = $150,000
The asset coverage ratio that results is equal to 2.07 or 206.67%.01 Dec, 2014 | 0 comments