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 the company is 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 payments would be smooth or not. Similarly, creditors make 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
The formula for calculating the 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
How to Calculate using Calculator
In order to calculate the 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:
Also Read: Cash Flow Coverage Ratio
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 and 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 the 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.
