Cash Flow-to-Debt Ratio

What is the 'Cash Flow-to-Debt Ratio'

The cash flow-to-debt ratio is a ratio of a company’s cash flow from operations to its total debt. The cash flow-to-debt ratio is a type of debt coverage ratio, and is an estimate of the amount of time it would take a company to repay its debt if it devoted all of its cash flow to debt repayment. Cash flow is used to evaluate a company’s funds rather than earnings because it provides a better insight into a company’s ability to pay its obligations. The ratio is less frequently calculated using EBITDA and free cash flow.

BREAKING DOWN 'Cash Flow-to-Debt Ratio'

While it is unrealistic for a company to devote all of its cash flow from operations to debt repayment, the cash flow-to-debt ratio provides a snapshot of the overall financial health of a company.  A high ratio indicates that a company is better able to pay back its debt, and is thus able to take on more debt if necessary.

Another way to calculate the cash flow-to-debt ratio is to look at a company’s EBITDA rather than cash flow from operations. This option is used less frequently because investment in inventory is included, and since inventory may not be sold quickly, it is not considered as liquid as cash from operations. Without further information about the make up of a company’s assets, it is difficult to determine whether a company is as readily able to cover its debt obligations in this method.

Some analysts use free cash flow instead cash flow from operations because that measure takes into account capital expenditures.

RELATED TERMS
  1. Operating Cash Flow Ratio

    A measure of how well current liabilities are covered by the ...
  2. Cash Ratio

    The ratio of a company's total cash and cash equivalents to its ...
  3. Cash Flow

    The net amount of cash and cash-equivalents moving into and out ...
  4. Levered Free Cash Flow

    The free cash flow that remains after a company has paid its ...
  5. Cash Value Added - CVA

    A measure of the amount of cash generated by a company through ...
  6. Cash Flow From Financing Activities

    A category in the cash flow statement that accounts for external ...
Related Articles
  1. Investing

    Analyzing IBM's Debt Ratios in 2016 (IBM)

    Look over the debt ratios for the IBM Corporation, such as its debt-to-equity ratio, its interest coverage ratio and its cash flow to debt ratio.
  2. Investing

    Debt Ratios: Cash Flow To Debt Ratio

    By Richard Loth (Contact | Biography)This coverage ratio compares a company's operating cash flow to its total debt, which, for purposes of this ratio, is defined as the sum of short-term borrowings, ...
  3. Investing

    Evaluating A Statement Of Cash Flows

    The metrics for the Statement of Cash Flows is best viewed over time.
  4. Investing

    Analyzing Verizon's Debt Ratios in 2016 (VZ)

    Analyze Verizon's key debt ratios, and understand how the company has been able to expand in recent years by safely increasing its debt load.
  5. Trading

    Free Cash Flow Yield: The Best Fundamental Indicator

    Cash in the bank is what every company strives to achieve. Find out how to determine how much a company is generating and keeping.
  6. Investing

    Cash Flow Indicator Ratios

    Learn about the operating cash flow to sales ratio, free cash flow to operating cash flow ratio and free cash flow coverage ratio.
  7. Markets

    Analyzing Apple's Debt Ratios in 2016 (AAPL)

    Discover detailed analyses of Apple's four debt ratios over quarterly and annual periods between 2014 and 2015, and learn why it is financially stable.
  8. Retirement

    The Essentials Of Corporate Cash Flow

    Tune out the accounting noise and see whether a company is generating the stuff it needs to sustain itself.
  9. Markets

    What is the Cash Ratio?

    The cash ratio is the ratio of a company's total cash and cash equivalents to its current liabilities.
  10. Markets

    Analyzing Pepsico's Debt Ratios in 2016 (PEP)

    Learn about PepsiCo and its financial leverage by looking at its debt-to-equity ratio, interest-coverage ratio and operating cash flow-to-debt ratio.
RELATED FAQS
  1. What are some ratios I can use the operating cash flow ratio with?

    Understand the importance of a company's operating cash flow. Learn about some of the financial ratios that use the operating ... Read Answer >>
  2. What metrics can be used to evaluate companies in the forest products sector?

    Understand some of the best financial and equity valuation measurements that can be utilized to evaluate companies in the ... Read Answer >>
  3. What is the relationship between the cash ratio and liquidity?

    Understand the relationship between a company's cash ratio and its liquidity. Learn what the cash ratio measures and what ... Read Answer >>
  4. Is free cash flow the same as net free cash flow?

    Know the difference between your net cash flow and free cash flow when pitching your company to any of your potential stockholders. Read Answer >>
  5. What metrics can be used when evaluating a telecommunications company to ensure its ...

    Learn about some common and useful cash flow accounting ratios that investors can use to evaluate companies in the telecommunications ... Read Answer >>
  6. What are some examples of how cash flows can be manipulated or distorted?

    Read about some of the most common accounting techniques that can be used to manipulate the operating cash flow on a company's ... Read Answer >>
Hot Definitions
  1. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  2. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  3. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
  4. Underweight

    1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
  5. Russell 3000 Index

    A market capitalization weighted equity index maintained by the Russell Investment Group that seeks to be a benchmark of ...
  6. Enterprise Value (EV)

    A measure of a company's value, often used as an alternative to straightforward market capitalization. Enterprise value is ...
Trading Center