The Asset Coverage Ratio measures a company's ability to repay its outstanding debt obligations by liquidating its physical (tangible) assets — providing creditors with an assessment of the asset-based collateral cushion backing the debt. It is calculated as: Asset Coverage Ratio = (Total Assets – Intangible Assets – Current Liabilities) ÷ Total Debt. A ratio above 1.0 indicates that the company has sufficient tangible assets to cover all outstanding debt even in a liquidation scenario. A ratio below 1.0 signals that creditors would face losses if the company were forced to liquidate. Asset coverage ratios vary significantly by industry — capital-intensive sectors like infrastructure, real estate, and manufacturing typically have high ratios because of their large tangible asset bases, while asset-light businesses like technology and consulting may have lower ratios. For Indian debt investors and bank credit analysts evaluating loan applications or NCD investments, the asset coverage ratio is a critical underwriting criterion — it determines whether secured lenders have adequate collateral protection. SEBI requires companies issuing secured NCDs to maintain a minimum asset cover of 1.0x on the secured assets pledged as collateral throughout the life of the instrument.
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