A test determining whether a company is allowed to
issue bonds. It is calculated by subtracting a company's
current liabilities from its
net assets and dividing the quantity by its total
debts and/or
preferred stock obligations; it may be expressed as dollar amount or as a percentage. Generally, a higher asset-coverage test is desirable, as it indicates the level of debt is low compared to net assets. A significant limitation of the asset-coverage test is the fact that it does not account for
liquidity when making the calculation.