what is a coverage ratio 
a coverage ratio broadly is a metric intended to measure a company s ability to service its debt and meet its financial obligations such as interest payments or dividends the higher the coverage ratio the easier it should be to make interest payments on its debt or pay dividends the trend of coverage ratios over time is also studied by analysts and investors to ascertain the change in a company s financial position investopedia julie bangunderstanding a coverage ratiocoverage ratios come in several forms and can be used to help identify companies in a potentially troubled financial situation though low ratios are not necessarily an indication that a company is in financial difficulty many factors go into determining these ratios and a deeper dive into a company s financial statements is often recommended to ascertain a business s health net income interest expense debt outstanding and total assets are just a few examples of financial statement items that should be examined to ascertain whether the company is still a going concern one should look at liquidity and solvency ratios which assess a company s ability to pay short term debt i e convert assets into cash investors can use coverage ratios in one of two ways first they can track changes in the company s debt situation over time in cases where the debt service coverage ratio is barely within the acceptable range it may be a good idea to look at the company s recent history if the ratio has been gradually declining it may only be a matter of time before it falls below the recommended figure coverage ratios are also valuable when looking at a company in relation to its competitors evaluating similar businesses is imperative because a coverage ratio that s acceptable in one industry may be considered risky in another field if the business you re evaluating seems out of step with major competitors it s often a red flag while comparing the coverage ratios of companies in the same industry or sector can provide valuable insights into their relative financial positions doing so across companies in different sectors is not as useful since it might be like comparing apples to oranges common coverage ratios include the interest coverage ratio debt service coverage ratio and asset coverage ratio these coverage ratios are summarized below types of coverage ratiosthe interest coverage ratio measures the ability of a company to pay the interest expense on its debt the ratio also known as the times interest earned ratio is defined as interest coverage ratio ebit interest expense