Coverage ratio

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Coverage ratio is the ration that is similar to the times-interest earned ratio, but it recognizes that many firms lease assets and also must make sinking fund payments. It is found by adding earnings before interest, taxes, depreciation, and amortization (EBITDA), and lease payments and then dividing this total by interest charges, lease payments, and sinking fund payments over 1 − T (where T is the tax rate).


Definitions

According to Financial Management Theory and Practice by Eugene F. Brigham and Michael C. Ehrhardt (13th edition),

Coverage ratio. Similar to the times-interest earned ratio, but it recognizes that many firms lease assets and also must make sinking fund payments. It is found by adding earnings before interest, taxes, depreciation, amortization (EBITDA), and lease payments and then dividing this total by interest charges, lease payments, and sinking fund payments over 1 − T (where T is the tax rate).

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