What is Cash Flow Coverage Ratio
Cash flow coverage ratio is a financial ratio that measures the company’s ability to pay off its debt both short-term debt and long-term debt over a specified period by cash flow that it generates from operations. The cash flow coverage ratio (CFCR) is the financial ratio calculated by dividing the cash flow from operations over a specified period by the company’s total liabilities.
The value of the cash flow coverage ratio shows how many times the company can pay off its debt by the generated cash flow. The CFCR value of 1 means the company generates cash flow from operating activities exactly equal to the company’s debt value.
- A cash flow coverage ratio of more than 1 means the company’s cash flow exceeds the total debt.
- A cash flow coverage ratio of less than 1 means the company’s cash flow is less than the total debt.
The higher value of the cash flow coverage ratio means the higher cash flow exceeds the company’s total debt. In other words, the higher value of the ratio reflects the company’s good financial health. In contrast, the lower value of the CFCR means the company generated cash flow from the operation within a given period less than its total liabilities.
Additionally, the cash flow coverage ratio can also indicate how many years it will take for a company to cover all of its debt if it can sustain its current cash flow situation. For the bank officer, they look closely at the number of this ratio to determine the repayment ability of a company when issuing a loan.
Cash Flow Coverage Ratio Formula & Calculation
The cash flow coverage ratio can be calculated by dividing the cash flow from operations by the company’s total debt, or the following cash flow coverage ratio formula:
CFCR = Cash flow from operations / Total debt
For example, the ABC company had a cash flow from the operation of $200,000 and total debt of $10,000.
- CFCR = 200,000 / 10,000 = 20
From the example above, the ABC company had the cash flow generated from operating activities 20 times more than the company’s liabilities.
FAQs
The cash flow coverage ratio is a financial ratio that measures the company’s ability to pay off its debt by cash flow generates from operations.
The cash flow coverage ratio can be calculated by the following formula: CFCR = Cash flow from operations / Total debt
The higher value of the cash flow coverage ratio reflects the company’s good financial health
