• Post category:Finance

## What is Cash Coverage Ratio

Cash coverage ratio is a financial ratio that measures the number of dollars of operating cash available to pay each dollar of interest expenses and other fixed charges. The cash coverage ratio is a simple comparison between cash and equivalents on hand to the interest expense.

The value of 1.00 of the cash coverage ratio means the company has the cash and cash equivalent equal to the interest expenses. Thus, the higher value of the cash coverage ratio, the more cash available for the interest expenses, and vice versa.

When the cash coverage ratio value is more than 1 means the company has the cash available more than the interest expenses. Conversely, when the cash coverage ratio number is less than 1 means the company’s total cash can not cover its interest expenses.

## Cash Coverage Ratio Formula

The cash coverage ratio can be calculated by dividing the total amount of cash and cash equivalent by the total interest expenses, or the following cash coverage ratio formula:

Cash Coverage Ratio = (Cash + Cash equivalent) / Interest expenses

Where:

Cash equivalent includes high liquidity short-term debt instruments that can convert to cash quickly (within 90 days) such as Treasury bills, short-term government bonds, and marketable securities. It does not include low liquidity assets like accounts receivable and inventory.

For example, the company had the following financial results last year:

• Cash: \$5,000
• Cash equivalents: \$1,000
• Interest expense: \$2,000

Cash coverage ratio = (5,000 + 1,000) / 2,000 = 3.00 times

This mean the company had the cash and cash equivalents available 3 times more than the interest expenses.

## FAQs

What is cash coverage ratio?

The cash coverage ratio measures the number of dollars of operating cash available to pay each dollar of interest expenses and other fixed charges.

What is the cash coverage ratio formula?

The cash coverage ratio is a simple comparison between cash and equivalents on hand to the interest expense, as the following cash coverage ratio formula: CCR = (Cash + Cash equivalent) / Interest expenses

What is a good cash coverage ratio value?

The higher value of the cash coverage ratio, the more cash available for the interest expenses.