Covering margin (first and second level) can be expressed in percentage terms as ratios that tie in with Equity to Fixed Assets Ratio (EAR) and (Long-term Debt + Equity)/Fixed Assets Ratio.

These measures are widely used by analysts, lenders, and rating agencies to evaluate the financial structure, capital intensity, and solvency of quoted companies.

1️⃣  Equity to Fixed Assets Ratio (EAR)

 Definition: Indicates how much of the fixed assets are financed by equity capital

What is the Equity Asset ratio ?

The Equity-Asset-ratio (EAR) is a KPI indicator for any company's structure of capital which takes its values from the Covering margin and compares them by dividing them and providing a measure in percentage terms over the company's ability to cover fixed investments (fixed assets) with its own means (equity). 

As a fact of the matter, this KPI is a ratio which expresses in percentage terms the enterprise’s ability to cover fixed investments with its equity capital, and, it expresses the enterprise’s soundness to self-finance the long-term investments (tangible and intangible fixed assets) in an autonomous and independent way without the need to resort to external funding sources.

How to calculate the EAR ?

As it is visible, this ratio derives from two parameters which are reported in the Balance sheet and are of patrimonial nature. This is why the EAR express the first deep learning for the solidity of a company and therefore its ability to self-finance fixed investments (fixed assets) in an autonomous and independent manner without resorting to external sources of financing. 

🧠 CM1 🟰 EQUITY ➗ FIXED ASSETS

It defines whether the level of fixed assets (investments) in that enterprise are covered by permanent resources or whether the company resorts to sources of financing to cover the fixed investments used for the exercise of the activity. On a Credit Risk Management perspective it defines whether the level of fixed assets (investments) is covered by long term resources or whether the company instead is subject to financial stress. therefore the company's capital solidity on a long term perspective.

If CM1 ≥ 1, fixed assets are fully covered by equity → considered conservative and financially solid.

 In practice, EAR = CM1. It is just another name used in solvency analysis.

2️⃣ (Long-term Debt + Equity) / Fixed Assets Ratio

Definition: Measures the share of fixed assets covered by permanent capital (both equity and LT debt)

Formula:

🧠 CM2 🟰 Equity➕Long-term Debt ➗ Fixed Assets

🔍 Relation Between Ratios

CM1 (EAR) looks only at equity coverage of fixed assets.

CM2 ((LT Debt + Equity)/FA) looks at total long-term funding coverage of fixed assets.

Generally:

CM1≤CM2

If CM1 < 1 but CM2 ≥ 1, it means equity is not sufficient to cover fixed assets, but long-term debt makes up the gap → acceptable, but indicates higher leverage risk.

If both < 1, fixed assets are partly financed with short-term liabilities → dangerous mismatch.

🧮 Uses

• For Investors → Gauge financial soundness and capital structure risk of quoted companies.

• For Creditors & Rating Agencies → Assess asset-liability maturity match and solvency.

• For Management → Ensure fixed investments are sustainably funded.

Rules of thumb:

• CM1 (EAR) ≥ 1 → very solid (rare in capital-intensive industries).

• CM2 ≥ 1 → minimum condition for financial balance.

💡 Example (Quoted Company – Simplified) 

Assume a manufacturing firm (capital intensive):

• Equity: $600m

• Long-term Debt: $400m

• Fixed Assets (net): $800m

• Current Liabilities: $300m

• Current Assets: $500m

Step 1: Calculate CM1 (EAR)

CM1=600 / 800=0.75

→ Only 75% of fixed assets are covered by equity.

Step 2: Calculate CM2

CM2=600+400 / 800=1.25

→ Fixed assets are fully covered by long-term funds.

📘 Interpretation:

The company has a solid long-term coverage (CM2 > 1)

But reliance on debt means equity cushion is below 1 (CM1 < 1).

Typical for industries like energy, telecom, and heavy manufacturing.

✅ Comparable Table