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.

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