Page 22 - Policy Economic Report - December 2025

POLICY AND ECONOMIC REPORT
OIL & GAS MARKET

Asset Coverage Ratio = Total Assets - Short-Term Liabilities / Total Debt

Where:

Total Assets = Tangibles (such as land, buildings, machinery, and inventory)

As a rule of thumb, utilities should have an asset coverage ratio of at least 1.5, and industrial companies
should have an asset coverage ratio of at least two.

Other Coverage Ratios

Several other coverage ratios are also used by analysts:

• The fixed-charge coverage ratio measures a firm's ability to cover its fixed charges, such as debt
payments, interest expense, and equipment lease expense. It shows how well a company's
earnings can cover its fixed expenses. Banks often look at this ratio when evaluating whether to
lend money to a business.

• The loan life coverage ratio (LLCR) is used to estimate the solvency of a firm—or the ability of a
borrowing company to repay an outstanding loan. The LLCR is calculated by dividing the net
present value (NPV) of the money available for debt repayment by the amount of outstanding
debt.

• The EBITDA-to-interest coverage ratio is used to assess a company's financial durability by
examining whether it is profitable enough to pay off its interest expenses.

• The preferred dividend coverage ratio measures a company's ability to pay off its required,
preferred dividend payments. Preferred dividend payments are the scheduled dividend payments
that are required to be paid on the company's preferred stock shares. Unlike common stock
shares, the dividend payments for preferred stock are set in advance. They cannot be changed
from quarter to quarter; the company is required to pay them.

• The liquidity coverage ratio (LCR) refers to the proportion of highly liquid assets held by financial
institutions to ensure their ongoing ability to meet short-term obligations. This ratio is essentially
a generic stress test; it is analysed to anticipate market-wide shocks and make sure that financial
institutions possess suitable capital preservation to ride out any short-term liquidity disruptions
that may impact the market.

• The capital loss coverage ratio is the difference between an asset’s book value and the amount
received from a sale relative to the value of the nonperforming assets being liquidated. The capital
loss coverage ratio is an expression of how much transaction assistance is provided by a regulatory
body for an outside investor to take part.

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