Funds From Operations (FFO) To Total Debt Ratio


DEFINITION of 'Funds From Operations (FFO) To Total Debt Ratio'

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.

BREAKING DOWN 'Funds From Operations (FFO) To Total Debt Ratio'

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.

  1. Overleveraged

    Occurs when a business is carrying too much debt, and is unable ...
  2. Tier 1 Leverage Ratio

    The relationship between a banking organization's core capital ...
  3. Leverage Build Up

    The accumulation of additional debt to enter a position that ...
  4. Highly Leveraged Transaction - ...

    A bank loan to a highly leveraged company. HLTs can be thought ...
  5. General And Administrative Leverage

    A variable within a cost benefit analysis of an acquisition where ...
  6. Operating Leverage

    Operating measurement is a measurement of the degree to which ...
Related Articles
  1. Home & Auto

    Leveraging Leverage For Bigger Profits

    Leverage is like fire. Find out how to use it to heat up your investing without burning your portfolio.
  2. Options & Futures

    Leveraged Investment Showdown

    Margin loans, futures and ETF options can all mean better returns, but which one should you pick?
  3. Options & Futures

    Hedge Fund Failures Illuminate Leverage Pitfalls

    Learn what mistakes cause hedge funds to collapse and how to avoid similar problems.
  4. Options & Futures

    Why Leveraged Investments Sink

    This powerful tool can have you swimming in money or drowning in underwater equity.
  5. Forex Education

    Forex Leverage: A Double-Edged Sword

    Find out how this flexible and customizable tool magnifies both gains and losses.
  6. Options & Futures

    Price Volatility Vs. Leverage

    Learn how to effectively gauge the risk of the markets you trade.
  7. Bonds & Fixed Income

    Leverage Your Returns With A Convertible Hedge

    Find out how you can maintain your income stream by using this type of bond strategy.
  8. Mutual Funds & ETFs

    Why Leveraged ETFs Don't Always Boost Returns

    These ETFs don't always provide the returns you expect. Find out why this happens, and what you can do about it.
  9. Options & Futures

    Leveraged ETFs: Are They Right For You?

    This specialty vehicle offers dramatic results, but can also magnify risk.
  10. Forex Education

    Leverage's "Double-Edged Sword" Need Not Cut Deep

    Learn to cut out losses quickly, leaving profits room to grow.
  1. How can I use the funds from operations to total debt ratio to assess risk?

    The funds from operations (FFO) to total debt ratio is used in fundamental analysis to determine a company's financial risk. ... Read Full Answer >>
  2. How many free credit reports can you get per year?

    Individuals with valid Social Security numbers are permitted to receive up to three credit reports every 12 months rather ... Read Full Answer >>
  3. What can working capital be used for?

    Working capital is used to cover all of a company's short-term expenses, including inventory, payments on short-term debt ... Read Full Answer >>
  4. Does working capital include short-term debt?

    Short-term debt is considered part of a company's current liabilities and is included in the calculation of working capital. ... Read Full Answer >>
  5. Are high yield bonds a good investment?

    Bonds are rated according to their risk of default by independent credit rating agencies such as Moody's, Standard & ... Read Full Answer >>
  6. How stable are municipal bonds?

    Stability is relative in the municipal bond market. Municipal bonds tend to be safer than many other types of investments, ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  2. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  3. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  4. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
  5. Black Monday

    October 19, 1987, when the Dow Jones Industrial Average (DJIA) lost almost 22% in a single day. That event marked the beginning ...
  6. Monetary Policy

    Monetary policy is the actions of a central bank, currency board or other regulatory committee that determine the size and ...
Trading Center