Cash Flow Coverage Ratio Calculator

Cash Flow Coverage Ratio

Cash Flow Coverage Ratio Calculator is a tool that helps in calculating whether a company’s cash flows from its operations can pay off its debt. This ratio is useful for creditors, banks, investors, and managers of the company to get an idea of how well is company performing financially.

The cash flow coverage ratio is a ratio of operating cash flow to its debt. It determines the liquidity as well as repayment position of a company.

Cash flow coverage ratios help banks to decide whether current debt payment would be smooth or not. Similarly, creditors take a decision whether to extend credit and up to what extent. It also helps management whether they need to make any efforts to supplement the cash flow to discharge the current liabilities and debts. At the same time, it indicates to the management what could be residual cash flow available to them for re-deployment for growth or for payment of dividends, etc. Investors try to evaluate whether they will receive dividends on their investment or not considering the excess of cash flow over the likely debt payments.

Formula for Calculating Cash Flow Coverage Ratio

Formula for calculating cash flow coverage ratio is:

Cash Flow Coverage Ratio = Operating Cash Flow / Total Debts Payable During the Year

About the Calculator / Features

The cash flow coverage ratio calculator simply calculates the ratio once the user provides the following details to it:

  • Operating cash flow
  • Total debt (due for the period under calculation)

Calculator

Cash Flow Coverage Ratio Calculator

How to Calculate using Calculator

In order to calculate cash flow coverage ratio using a calculator, the user has to simply insert the following data into the calculator:

Operating Cash Flow

Operating cash flow determines the company’s cash flows from its operations. This figure can be obtained from the cash flow statement of the company. Also, the formula to calculate operating cash flow is as follows:

Operating Cash Flow = EBIT (+/-) Changes in Working Capital (+/-) non-cash items – Tax

Total Debt

The total debt of a company includes the borrowings of the company. Both principal amount, as well as interest due on such amount for the period under calculation, are to be considered for computing the cash flow coverage ratio . We can also call it the cash flow to debt ratio. . We can also call it the cash flow to debt ratio..

Example of Cash Flow Coverage Ratio

Let us try to understand the concept of cash flow coverage ratio with the help of an example.

The operating cash flows of a company YZ Ltd. are $50,000,000 and the total debt to be paid during the year amounts to $ 23,000,000. Calculate cash flow coverage ratio.

Cash Flow Coverage Ratio = $50,000,000 / $23,000,000 = 2.17

Interpretation of Cash Flow Coverage Ratio

The aim of finding a cash flow coverage ratio is to analyze the liquidity position of the company. It determines whether the company has enough cash from its operations to meet its debt obligations. A ratio resulting in 1 or more than 1 is treated to be a good ratio. It suggests that the company’s cash flows through its operations are sufficient for paying off its debt.

In the example above, the ratio is 2.17 which means that the operating cash flow is 2.17 times more than the debt of the company. It shows a good liquidity position of the company which means the cash flows of the company are enough to cover its debt.

Cautions

The shareholders of the company are more concerned about the dividends they would receive against their investment in the company. As they stand last in the line to get the return, they are also equally concerned to know about the cash flow coverage ratio. Because they can hope to get the dividends only when the cash flow from operations is sufficiently far in excess of the debt obligations and current liabilities.



Sanjay Borad

Sanjay Bulaki Borad

Sanjay Borad is the founder & CEO of eFinanceManagement. He is passionate about keeping and making things simple and easy. Running this blog since 2009 and trying to explain "Financial Management Concepts in Layman's Terms".

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