Cash Flow Coverage Ratio

A printable cheatsheet with calculations
and notes

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Cash Flow Coverage Ratio

Cash Flow Coverage Ratio =

Operating Cash Flows

Total Debt

AKA: Cash Flow to Debit

INTERPRETATION

This ratio shows the percentage of debt that the current cash flow can retire.

Business owners, managers, and other interested parties use it to indicate how much time a company would take to pay off all of its debt if it used all of its operating cash flow for debt repayment.

Note: expanded calculation

Cash flow from operations / total liabilities

Can also use: Cash Flow Coverage Ratio = (EBIT + depreciation + amortization) / Total Debt

EXAMPLE

Assume that M&M Company, Inc. has total debt of $1,250,000 and cash flow from operations for the year of $312,500. 

Calculate the company’s cash flow to debt ratio as follows:

Cash Debt Coverage = $312,500 /$1,250,000 = .25 = 25%

The company’s ratio result of 25% indicates that assuming it has stable, constant cash flows, it would take approximately four years to repay its debt since it would be able to repay 25% each year.

Dividing the number 1 by the ratio result (1 / .25 = 4)

BENCHMARK: HA, PG, ROT

A high ratio indicates that a company is better able to pay back its debt and is thus able to take on more debt if necessary.

Cash Flow Coverage Ratio:

ABBREVIATION KEY:

ROT: Rule of thumb
HA: Historical Average (organization’s historical average)
PG: Peer Group average
EB: Economic Benchmark

DISCLAIMER: The interactive calculators on this site are self-help tools intended to help you visualize and explore your financial information. They are not intended to replace the advice of a qualified professional. Because each business is different, we can not guarantee accuracy.