What is Cash Debt Coverage Ratio
Cash debt coverage ratio is a financial ratio that measures the company’s ability to repay its liabilities by using the cash generated from the operating activities. The cash debt coverage ratio can indicate the company’s solvency or the company’s ability to survive over the long run.
The cash to debt coverage is a ratio that is a comparison between the net cash of operating activities with the total debt of the company. The cash debt coverage ratio reflects the overall financial stability of a company excluding investment in low liquidity such as inventory that may not be sold quickly.
The cash debt coverage ratio value of 1 means the company has the cash from the operation activity equal to the total liabilities, which means the company is able to pay its debt by using cash from the operating activities.
The higher value of the cash debt coverage ratio indicates the higher company’s financial stability. Conversely, the lower value of the ratio implies that the company may have a financial stability issue due to the ability to repay debt.
Cash Debt Coverage Ratio Formula
The cash debt coverage ratio is calculated by dividing the company’s cash from operating activities by the company’s total debt while the total debt is represented by average total liabilities, or the following cash debt coverage ratio formula:
Cash debt coverage = Cash provided by operating activities / average total liabilities
Cash debt coverage = Cash provided by operating activities / total liabilities
Let’s say the Feriors company has a total liability of $10,000 and cash from the operation of $40,000 for this financial year.
Cash debt coverage = $40,000 / $10,000 = 4 times (or 400%)
The cash debt coverage ratio of 4 indicates each dollar of total liabilities there were $400 of cash generated by operating activities.