Coverage ratio
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, 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).
Related concepts
- Financial management. A combination of enterprise efforts undertaken in order to procure and utilize monetary resources of the enterprise.
