Cash Flow-to-Debt Ratio

Definition of 'Cash Flow-to-Debt Ratio'


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.

Investopedia explains '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.



comments powered by Disqus
Hot Definitions
  1. Benchmark Bond

    A bond that provides a standard against which the performance of other bonds can be measured. Government bonds are almost always used as benchmark bonds. Also referred to as "benchmark issue" or "bellwether issue".
  2. Market Capitalization

    The total dollar market value of all of a company's outstanding shares. Market capitalization is calculated by multiplying a company's shares outstanding by the current market price of one share. The investment community uses this figure to determine a company's size, as opposed to sales or total asset figures.
  3. Oil Reserves

    An estimate of the amount of crude oil located in a particular economic region. Oil reserves must have the potential of being extracted under current technological constraints. For example, if oil pools are located at unattainable depths, they would not be considered part of the nation's reserves.
  4. Joint Venture - JV

    A business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task. This task can be a new project or any other business activity. In a joint venture (JV), each of the participants is responsible for profits, losses and costs associated with it.
  5. Aggregate Risk

    The exposure of a bank, financial institution, or any type of major investor to foreign exchange contracts - both spot and forward - from a single counterparty or client. Aggregate risk in forex may also be defined as the total exposure of an entity to changes or fluctuations in currency rates.
  6. Organic Growth

    The growth rate that a company can achieve by increasing output and enhancing sales. This excludes any profits or growth acquired from takeovers, acquisitions or mergers. Takeovers, acquisitions and mergers do not bring about profits generated within the company, and are therefore not considered organic.
Trading Center