degree of coverage is a key figure that shows what percentage of a company's revenue is left after the variable costs have been deducted. In other words, it is a measure of how much of the turnover can be used to cover the fixed costs and create a profit.
Formel
The degree of coverage is typically calculated as follows:
Coverage ratio = (Coverage contribution / Revenue) × 100
hvor:
- Coverage contribution = Revenue – Variable costs
- Turnover = Sales revenue from goods or services
Example
A company sells goods for DKK 1,000,000. The variable costs are DKK 600,000.
- Coverage contribution = 1,000,000 – 600,000 = DKK 400,000.
- Coverage ratio = (400,000 / 1,000,000) × 100 = 40%
This means that 40% of the turnover is available to cover fixed costs and make a profit.
Anvendelse
The coverage ratio is used to assess the profitability of products, customers or the entire company. A high coverage ratio means that the company has relatively low variable costs in relation to revenue, which often results in better financial resilience.
Vigtige pointer
- Coverage rates vary between industries – for example, retail often has lower coverage rates than consulting companies.
- It is a key figure in budgeting and pricing.
- Can be used for break-even calculation: how much does the company have to turn over to cover all fixed costs.