• Post category:Finance

## What is Current Cash Debt Coverage

Current cash debt coverage ratio is a financial ratio that measures the company’s ability to repay its current liabilities by using the operating activities cash flow receives during an accounting period. The current cash debt coverage ratio is a simple comparison between the operating cash flow that is received by the company’s operation activities with the company’s total current liabilities.

The current cash debt coverage ratio of 1.00 means the company has the operation activity cash flow exactly equal to the total current liabilities, which means the company is able to pay its all debt by using all cash from the operating activities during an accounting period.

In other words, the current cash debt coverage ratio is the answer to the question: Is the company generating sufficient cash flow provided by operating activities to meet its current obligations?

The higher value of the current cash debt coverage ratio reflects 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.

## Current Cash Debt Coverage Ratio Formula

The current cash debt coverage ratio can be calculated by dividing the net cash provided by operating activities by the average current liabilities (or total current liabilities), or the following current cash debt coverage ratio formula:

Current cash debt coverage ratio = Cash provided by operating activities / Average current liabilities

or

Current cash debt coverage ratio = Cash provided by operating activities / Total current liabilities

Where:

Average current liabilities = (Current liabilities at the beginning of the year + Current liabilities at the end of the year) / 2

Let’s say the Feriors company has a total current liability of \$10,000 and cash from the operation of \$50,000 for this financial year.

Cash debt coverage = \$50,000 / \$10,000 = 5 times (or 500%)

The cash debt coverage ratio of 5 indicates each dollar of total liabilities there were \$500 of cash generated by operating activities.