Cash Flow-to-Debt Ratio

AAA

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.

RELATED TERMS
  1. Price-To-Sales Ratio - PSR

    A valuation ratio that compares a company’s stock price to its ...
  2. Retention Ratio

    The proportion of earnings kept back in the business as retained ...
  3. Ratio Analysis

    Quantitative analysis of information contained in a company’s ...
  4. Sortino Ratio

    A modification of the Sharpe ratio that differentiates harmful ...
  5. P/E 10 Ratio

    A valuation measure, generally applied to broad equity indices, ...
  6. Degree Of Financial Leverage - ...

    A ratio that measures the sensitivity of a company’s earnings ...
RELATED FAQS
  1. What metrics can be used to evaluate companies in the automotive sector?

    Primary equity evaluation metrics used by analysts and investors to evaluate companies in the automotive sector include those ... Read Full Answer >>
  2. What metrics can be used to evaluate companies in the forest products sector?

    The forest products sector is composed of companies in the paper products and timber industries. The nature of paper products ... Read Full Answer >>
  3. What is the difference between the debt ratio of a company and the debt ratio of ...

    The difference between the debt ratio of a company and the debt ratio of an individual is primarily one of scale and complexity. ... Read Full Answer >>
  4. Why can additional paid in capital never have a negative balance?

    The additional paid-in capital figure on a company's balance sheet can never be negative because companies do not pay investors ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. Why is a company's Cash Flow from Financing (CFF) important to both investors and ...

    A company's cash flow from financing activities (CFF) is important to investors and creditors because it depicts how much ... Read Full Answer >>
Related Articles
  1. Fundamental Analysis

    Financial Analysis: Solvency Vs. Liquidity Ratios

    Solvency and liquidity are equally important for a company's financial health. A number of financial ratios are used to measure a company’s liquidity and solvency, and an investor should use ...
  2. Fundamental Analysis

    Analyzing Investments With Solvency Ratios

    Solvency ratios are extremely useful in helping analyze a firm’s ability to meet its long-term obligations; but like most financial ratios, they must be used in the context of an overall company ...
  3. Fundamental Analysis

    Cash Flow Statement: Reviewing The Cash Flow From Operations

    A company's ability to consistently generate positive cash flows from its daily business operations is highly valued by investors. Operating cash flow can uncover a company's true profitability ...
  4. Fundamental Analysis

    An Introduction To Coverage Ratios

    Interest coverage ratios help determine a company's ability to pay down its debt.
  5. Investing Basics

    Leverage: What It Is And How It Works

    Leverage is an investment strategy of using borrowed money to generate outsized investment returns. Before getting into greater detail on how leverage works in an investment context, it is useful ...
  6. Investing

    Operating Leverage Captures Relationships

    Find out how fixed and variable costs interact to shed new light on old companies.
  7. Fundamental Analysis

    Making Sense of Netflix's Balance Sheet

    Understand how to assess Netflix's performance based on the major components of its balance sheet.
  8. Investing

    Advising FAs: Explaining Debt to a Client

    This article examines the different types of debt and breaks down which types of debt are better than others. The main types of debt covered here include car loans, credit cards, mortgages and ...
  9. Investing

    Is It Wise to Copy George Soros's Investment Strategy?

    One of the most successful investors ever is George Soros. Does that means you should follow his investing strategy?
  10. Brokers

    10 Most Famous Public Companies That Went Private

    Here’s a list of the most popular listed companies that went private in recent decades.

You May Also Like

Hot Definitions
  1. Topless Meeting

    A meeting in which participants are not allowed to use laptops. A topless meeting organizer can also ban the use of smartphones, ...
  2. Hedging Transaction

    A type of transaction that limits investment risk with the use of derivatives, such as options and futures contracts. Hedging ...
  3. Bogey

    A buzzword that refers to a benchmark used to evaluate a fund's performance. The benchmark is an index that reflects the ...
  4. Xetra

    An all-electronic trading system based in Frankfurt, Germany. Launched in 1997 and operated by the Deutsche Börse, the Xetra ...
  5. Nuncupative Will

    A verbal will that must have two witnesses and can only deal with the distribution of personal property. A nuncupative will ...
  6. OsMA

    An abbreviation for Oscillator - Moving Average. OsMA is used in technical analysis to represent the variance between an ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!