Asset And Interest Cover

In my earlier articles on ratio analysis,asset cover and interest cover are commonly used by lenders to judge the safety of their lending in terms of security and earning ability to pay by the borrower respectively.

The article describe some of the features of these two ratio in this Glossary of Debt Section/Category.

For asset cover,firstly the formula of the ratio is  Net Assets/Total Debts. The lenders used this ratio to judge the security of their lending. And to assess the comfort level of the asset cover,lenders will review the nature of assets( cash (100%),property(80%),stock and debtors (50%)

And

As for interest cover:

An equally important ratio,a bank will look at in determining whether to advance a loan. The lender looks at the number of times a company would be able to pay interest out of its earnings before interest. It indicates at a very basic level whether or not a business will be able to services its debts.

We might said that this interest cover is more important than the asset cover  in reaching decisions about loans. ( simply said you might have the required assets level (asset cover) but without the business able to generate the earnings ( interest cover),the business might lend itself into insolvency which might need to lenders ultimately disposing of its assets ).  

Usually,most bankers will start to get worried or uncomfortable when about the level of earnings when it is between two and three times interest.

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