Coverage ratio

The coverage ratio shows what percentage of revenue remains to cover fixed costs and generate profit once variable costs have been paid. It is a key financial management indicator because it provides a clear picture of how robust the company is to fluctuations in sales and how strong its operating economy is.

How is coverage ratio calculated?

The coverage ratio is calculated in two steps:

Contribution margin = Revenue – Variable costs
Contribution margin ratio = (Contribution margin / Revenue) × 100

Example:
Revenue: DKK 1,000,000
Variable costs: DKK 600,000
Contribution margin: DKK 400,000
Contribution ratio: 40%

This means that 40% of revenue is available to pay fixed costs and generate profit.

What does coverage ratio mean in practice?

The coverage ratio shows how much the company earns from its activities before fixed costs come into play.

A high coverage ratio provides the company with:

• greater resilience to declines in sales
• better investment opportunities
• room for price competition

A low contribution margin means that even small declines in revenue can result in losses because fixed costs represent a significant burden. For this reason, many companies actively use the contribution margin for pricing, cost management, and product mix analysis.

What is a good coverage ratio?

It depends on the industry and business model.

• In retail and food production, 5–10% is normal.
• In the service and consulting industry, 40–60% is not uncommon because variable costs are low.

The most important thing is not the figure itself, but whether the coverage ratio is stable and in line with the industry standard.

How can coverage be improved?

There are three classic strategies:

• Raise prices: increase the contribution margin per unit.
• Reduce variable costs: better supplier agreements, efficient production, lower distribution costs.
• Focus on high-margin products: and cut back on items that drag down the average.

Even small changes can have a big impact because coverage affects the entire earnings structure.

Industry-related differences

Coverage ratio and gross profit margin are often used in similar analyses, but:

• Coverage ratio is used primarily in manufacturing companies where fixed and variable costs can be separated.
• Gross profit margin is typically used in trading companies where the purchase price is the primary variable cost.

Both key figures essentially show how much revenue contributes before fixed costs are deducted.

Coverage and Qatchr

Annual accounts do not typically break down costs into variable and fixed items, so it is not possible to calculate the coverage ratio directly from public data.

In return, Qatchr, our online credit platform, provides access to key figures such as gross profit, pre-tax profit, and profit margin, which are often used in combination with internal data to analyze coverage and its development. This provides a solid data basis for management, risk analysis, and decision-making.

FAQ

What is coverage ratio?
The percentage of revenue remaining after variable costs.

Is a higher coverage ratio always better?
Yes, generally speaking – but it must be viewed in relation to the industry and business model.

How can coverage be improved?
By raising prices, reducing variable costs, or focusing on high-margin products.