Funds From Operations (FFO) To Total Debt Ratio

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DEFINITION

A leverage ratio that a credit rating agency or an investor can use to evaluate a company’s financial risk. Funds From Operation (FFO) to total debt is a metric comparing earnings from net operating income plus depreciation, amortization, deferred income taxes and other noncash items to long-term debt plus current maturities, commercial paper and other short-term loans. Costs of current capital projects are not included in total debt for the purposes of this ratio.

INVESTOPEDIA EXPLAINS

The lower the FFO to total debt ratio, the more highly leveraged the company is. The higher the FFO to total debt ratio, the stronger the position the company is in to pay its debts from its operating income. Companies may have resources other than funds from operations for repaying debts; they might take out an additional loan, sell assets, issue new bonds or issue new stock.  

For corporations, the credit agency Standard and Poor’s considers a company with an FFO to total debt ratio of more than 60 to have minimal risk. One with modest risk has a ratio of 45 to 60; one with intermediate risk has a ratio of 30 to 45; one with significant risk has a ratio of 20 to 30; one with aggressive risk has a ratio of 12 to 20; and one with high risk has an FFO to total debt ratio below 12. However, these standards vary by industry. For example, an industrial (manufacturing, service or transportation) company might need an FFO to total debt ratio of 80 to earn an AAA rating, the highest credit rating.

FFO to total debt alone does not provide enough information to make a decision about a company’s financial standing. Other related, key leverage ratios for evaluating a company’s financial risk include debt to EBITDA, which tells investors how many years it would take the company to repay its debts, and debt to total capital, which tells investors how a company is financing its operations.


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