Coverage Ratios

Measures the degree of protection for long-term creditors and investors

Debt To Total Assets

Debt to total assets measures the ratio of total assets required to cover debts. It is used to measure the financial risk to creditors, the lower the ratio to smaller the risk.

Times Interest Earned

Time interest earned measures a businesses’ ability to meet interest payments as they come due, also referred to as “Interest coverage ratio” and “fixed-charged coverage.” A lower ratio means less earning are available to meet interest payments and that the business is more vulnerable to increases in interest rates. Typically a business wants a ratio above 2.5.

Preferred Dividend Coverage Ratio

Preferred dividend coverage ratio measures a business’ ability to pay off its required preferred dividend payments. This ratio predicts a company's ability to pay off its preferred dividend requirements, and also gives an idea of how likely common dividends are be paid.

Cash Debt Coverage Ratio

Cash debt coverage ratio measures a company’s ability to repay its total liabilities in a given year from its operations. Generally a ratio of 1.0 is comfortable with higher numbers better.

Book Value Per Share

Measures the amount each share would receive if the company were liquidated at the amounts reported on the balance sheet

Free Cash Flow

Net cash provided by operating activities
Less: Capital expenditures
Less: Dividends

Free Cash Flow (FCF) is the cash that a company is able to generate after paying out the money required to maintain or expand its asset base. FCF is a litmus test against earnings, as accounting trickery that can fake accrued earnings will not work with cash flow.

Accounting Actualities