The cash flow to debt ratio is a
financial ratio
A financial ratio or accounting ratio states the relative magnitude of two selected numerical values taken from an enterprise's financial statements. Often used in accounting, there are many standard ratios used to try to evaluate the overall fin ...
that measures a company's ability to cover its total
debt
Debt is an obligation that requires one party, the debtor, to pay money Loan, borrowed or otherwise withheld from another party, the creditor. Debt may be owed by a sovereign state or country, local government, company, or an individual. Co ...
with its operating
cash flow
Cash flow, in general, refers to payments made into or out of a business, project, or financial product. It can also refer more specifically to a real or virtual movement of money.
*Cash flow, in its narrow sense, is a payment (in a currency), es ...
. It is calculated by dividing the cash flow from operations by the total debt outstanding, providing insight into how many years it would take to repay all debt assuming constant cash flow.
This ratio is widely used by
financial analysts and creditors to evaluate a company's
liquidity
Liquidity is a concept in economics involving the convertibility of assets and obligations. It can include:
* Market liquidity
In business, economics or investment, market liquidity is a market's feature whereby an individual or firm can quic ...
and financial health, particularly its capacity to manage debt without relying on external financing.
Unlike the
debt service coverage ratio
The debt service coverage ratio (DSCR), also known as the debt coverage ratio (DCR), is a financial ratio that measures an entity's ability to generate sufficient cash to cover its debt obligations, including interest, principal, and lease paymen ...
(DSCR), which focuses on annual debt payments, the cash flow to debt ratio considers the entire debt balance, making it a broader indicator of leverage. A higher ratio suggests stronger debt repayment ability, while a lower ratio may signal financial strain.
Calculation
The cash flow to debt ratio is expressed as:
:
Where:
* Cash Flow from Operations is the cash generated from core business activities, typically found in the
cash flow statement
In financial accounting, a cash flow statement, also known as ''statement of cash flows'', is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to oper ...
of a company's
financial statements
Financial statements (or financial reports) are formal records of the financial activities and position of a business, person, or other entity.
Relevant financial information is presented in a structured manner and in a form which is easy to un ...
, excluding cash flows from financing or investing activities.
* Total Debt includes all short-term and long-term liabilities, such as loans and bonds, reported on the
balance sheet
In financial accounting, a balance sheet (also known as statement of financial position or statement of financial condition) is a summary of the financial balances of an individual or organization, whether it be a sole proprietorship, a business ...
.
For example, if a company has $50 million in cash flow from operations and $200 million in total debt, its cash flow to debt ratio is 0.25, meaning it generates 25% of its debt in cash flow annually.
Interpretation
A ratio above 1 indicates that a company could theoretically repay all debt within a year using operating cash flow, though this is rare.
Ratios between 0.2 and 0.5 are common for healthy firms, depending on industry norms—higher values suggest better coverage, while lower values (e.g., below 0.1) may raise concerns about solvency. Unlike the
price-to-cash-flow ratio, which assesses market valuation, this ratio focuses solely on debt management. Context, such as industry standards and economic conditions, is critical for interpretation.
See also
*
Debt service coverage ratio
The debt service coverage ratio (DSCR), also known as the debt coverage ratio (DCR), is a financial ratio that measures an entity's ability to generate sufficient cash to cover its debt obligations, including interest, principal, and lease paymen ...
*
Price-to-cash-flow ratio
*
Financial ratio
A financial ratio or accounting ratio states the relative magnitude of two selected numerical values taken from an enterprise's financial statements. Often used in accounting, there are many standard ratios used to try to evaluate the overall fin ...
References
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Financial ratios