This article proposes a new method to calculate debt coverage ratios, enhancing financial statement analysis through better earnings insights.
ABSTRACT: This article proposes a better method for calculating debt coverage than that advocated traditionally for financial statement analysis. Statistical concepts of dispersion are used to measure the volatility of the earnings stream. These are then incorporated into a calculation of debt coverage which can be used to express probability beliefs concerning ability to repay. Coverage ratios are developed for the case where there is no trend, then the effects of trend are introduced. The proposed method deals with volatility in earnings and trends in earnings better than traditional methods.
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Harold E. Wyman (1977) studied this question.
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