Page 21 - Policy Economic Report - December 2025
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POLICY AND ECONOMIC REPORT
                   OIL & GAS MARKET

                                          Lessons from Economics

                                                                     Coverage Ratio

               Coverage ratios are a group of financial metrics used by lenders, investors, and analysts to measure a
               company's ability to service its debt and meet other financial obligations. A high coverage ratio indicates
               that it is likely the company will meet its future interest payments and meet all its financial obligations.

               Analysts and investors may study any changes in a company's coverage ratio over time to assess the
               company's financial position. Coverage ratios are also valuable when comparing one company to its
               competitors. Evaluating the coverage ratios of companies in the same industry or sector can provide
               useful insights into their relative financial positions.

               Types of Coverage Ratios

               There are different types of coverage ratios. Common coverage ratios include the interest coverage ratio,
               debt service coverage ratio, and asset coverage ratio.

                   • Interest Coverage Ratio

               The interest coverage ratio measures the ability of a company to pay the interest expenses on its debt.
               The interest coverage ratio—also called the times interest earned (TIE) ratio—is defined as:

               Interest Coverage Ratio = EBIT / Interest Expense

               Where:

               EBIT = Earnings before interest and taxes

               An interest coverage ratio of two or higher is generally considered satisfactory.

                   • Debt Service Coverage Ratio

               The debt service coverage ratio (DSCR) measures how well a company is able to pay its entire debt service.
               Debt service includes all principal and interest payments due to be made in the near term. The ratio is
               defined as:

               DSCR = Net Operating Income / Total Debt Service

               A ratio of one or above is indicative that a company generates sufficient earnings to completely cover its
               debt obligations.

                   • Asset Coverage Ratio

               The asset coverage ratio is similar in nature to the debt service coverage ratio, but it looks at balance
               sheet assets (instead of comparing income to debt levels). The ratio is defined as:

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