Bond covenants and rating agencies use this ratio to ask a very specific liquidation question: if the company sold off its tangible assets today, how many times over could it repay total debt?
How it works
Subtracting intangible assets from total assets, then subtracting the non-short-term portion of current liabilities, gives a tangible net asset figure; dividing that by total debt gives the asset coverage ratio.
What this does not include
This does not include the market value of assets in an actual liquidation, which often differs meaningfully from book value — the ratio is a book-value-based screening tool, not a precise recovery estimate.
How to use this calculator
- Enter total assets, intangible assets, current liabilities, short-term debt, and total debt.
A worked example
Total assets $5,000,000, intangible assets $500,000, current liabilities $800,000, short-term debt $200,000, total debt $2,000,000: asset coverage ratio = 1.95 — the tangible assets available comfortably cover total debt.
What the variables mean
| Variable | Meaning |
|---|---|
| Total assets | Everything the company owns |
| Intangible assets | Non-physical assets like goodwill, excluded from the tangible coverage figure |
| Total debt | All outstanding debt obligations |
Edge cases worth knowing
Intangible assets are excluded because they’re hard to liquidate to pay off debt. Goodwill and patents don’t reliably convert to cash in a liquidation scenario, so this ratio focuses on tangible assets that creditors could actually realize value from.
Zero total debt makes the ratio undefined — there’s no debt to compare asset coverage against, so the calculator returns no result.
Frequently asked questions
What’s considered a healthy asset coverage ratio?
A ratio above roughly 2.0 is generally considered safe for most industrial companies, though acceptable levels vary meaningfully by industry and capital intensity.
Why exclude intangible assets specifically?
Intangibles like goodwill often become worthless or heavily impaired in a bankruptcy or liquidation, so excluding them gives a more conservative, liquidation-relevant view of asset backing.
Is this the same as the current ratio?
No — the current ratio compares current assets to current liabilities for short-term liquidity; the asset coverage ratio instead compares nearly all tangible assets to total debt for longer-term solvency.
