Cash Flow-to-Debt Ratio

Cash Flow-to-Debt Ratio
See also

The Cash Flow-to-Debt Ratio designates the company's capability to cover its total debt with yearly cash flow from operations. A high cash flow to debt ratio gives the company a great position to cover total debt. This formula's type is debt measure ( M.Rist, A.J.Pizzica, Penhagenco LLC 2014, p.25). The Cash Flow-to-Debt Ratio is accustomed to establish the quantity of cash flow possible to pay down fixed debt payment responsibilities. A ratio well above one is a type of owning not only enough funds to meet debt repayment needs but also of supporting more debt commitments if essential (S.M.Bragg 2003, p.64).

Formula of Cash Flow-to-Debt Ratio

The formula of Cash Flow-to-Debt Ratio is presented as\[Cash Flow-to-Debt Ratio=\frac{Operating cash flow}{Total debt}\]

Example of Cash Flow-to-Debt Ratio

A very simple example is shown by Michael Rist, Albert J. Pizzica and Penhagenco LLC and it reads as follows: "ABC Company has cash flow from operations in the amount of $8,145 and total debt ( short term and long term) in the amount of $22,005. This gives a debt ratio of 0.37.

\(Cash Flow-to-Debt Ratio=\frac{8,145}{22,005}=0.37\)

A cash flow to debt ratio of 0.37 indicates that it will take the company over three years (i.e., 3.7 times) to cover its total debt. This number can be compared to industry averages or other companies to compare debt loads." ( M.Rist, A.J.Pizzica, Penhagenco LLC 2014, p.25)

Debt ratios

Debt ratios measure the company's total debt load and the mix of assets and debt. Debt ratios provide us a look at the company's leverage ratio. Debt ratios can be fine, bad, or neutral, depending on many determinants containing who is asking. As an example, a high overall debt ratio may be good for shareholders not wanting to reduce their shares but bad for the mortgagers of the company. The most common debt ratios except Cash Flow-to-Debt Ratio involve the following (M.Rist, A.J.Pizzica, Penhagenco LLC 2014, p.5):

  • Asset to equity
  • Interest coverage
  • Debt ratio
  • Asset turnover
  • Debt to equity
  • Equity multiplier


Author: Paulina Zając