The earnings base family of ratios can be defined as those ratios which bring together the balance sheet and income statement. Interest coverage is considered part of the earnings base family, since the amount of debt plays a large role in establishing the strength of this ratio. There are various definitions for the various coverage ratios. Fixed charges usually includes capitalized leases. Earnings are core, recurring earnings, and are adjusted for unusual items.
Total debt includes all interest bearing debt.
Advantages of this family of ratios is that they show and measure the relationship between cash flow, profitability and the amount of debt. Disadvantages are that these ratios tend to be unstable, and show high fluctuations year by year. This is particularly so in Canada, where Canada's natural resources base industrial sector is very volatile. Asset Base Ratios Asset base ratios are defined as that family of ratios measuring pure long term balance sheet items - both assets and liabilities. The ratio is defined as short and long term debt divided by short and long term debt plus equity.