1. Debt Ratios: Introduction
  2. Debt Ratios: Overview Of Debt
  3. Debt Ratios: The Debt Ratio
  4. Debt Ratios: Debt-Equity Ratio
  5. Debt Ratios: Capitalization Ratio
  6. Debt Ratios: Interest Coverage Ratio
  7. Debt Ratios: Cash Flow To Debt Ratio

This coverage ratio compares a company's operating cash flow to its total debt. Operating cash flow is defined as the amount of cash generated by the company’s normal business operations.

As an example, take a manufacturing company that reports a net income of $100 million, with an operating cash flow of $150 million. The difference comes from adding to the net income depreciation expense of $150 million, subtracting increases in accounts receivable of $50 million, adding decreases in inventory of $50 million and subtracting decreases in accounts payable of $100 million.

Depreciation is an expense for accrual accounting purposes, but there is no cash outlay so it is added back to reported net income. Increases in accounts receivables denote increased revenues but result in no actual cash inflows, hence they are subtracted. A decrease in inventories would indicate that less money had been spent adding to inventories, hence the increase in cash flow. An increase in inventories would have been a reduction in cash flow. The decrease in accounts payables means that the firm paid down some of its payables, which is a use or reduction of cash.

Debt is the sum of short-term borrowings, the current portion of long-term debt and long-term debt.

This ratio provides an indication of a company's ability to cover total debt with its yearly cash flow from operations. The higher the percentage ratio, the better the company's ability to carry and service its total debt.


Related Articles
  1. Investing

    Analyze Cash Flow The Easy Way

    Find out how to analyze the way a company spends its money to determine whether there will be any money left for investors.
  2. Investing

    Operating Cash Flow: Better Than Net Income?

    Differences between accrual accounting and cash flows show why net income is easier to manipulate.
  3. Investing

    Cash Flow Indicator Ratios

    Learn about the operating cash flow to sales ratio, free cash flow to operating cash flow ratio and free cash flow coverage ratio.
  4. Investing

    The Essentials Of Corporate Cash Flow

    Tune out the accounting noise and see whether a company is generating the stuff it needs to sustain itself.
  5. Investing

    Fundamental Case Study: Is Amazon's Cash Flow Actually Solid? (AMZN)

    Review Amazon's cash flow situation, including its free cash flow yield, operating cash flow from organic growth and cash flow from debt financing.
  6. Investing

    Evaluating A Statement Of Cash Flows

    The metrics for the Statement of Cash Flows is best viewed over time.
  7. Investing

    Cash Flow From Operating Activities

    Cash flow from operating activities is a section of the Statement of Cash Flows that is included in a company’s financial statements after the balance sheet and income statements.
  8. Investing

    Free Cash Flow Yield: The Best Fundamental Indicator

    Cash in the bank is what every company strives to achieve. Find out how to determine how much a company is generating and keeping.
Frequently Asked Questions
  1. What are the primary differences between a closed end investment and an open end investment?

    Learn what the primary differences are between open-end investments and closed-end investments, and the implications for ...
  2. Why is Ireland sometimes referred to as a tax haven?

    Learn why Ireland is a desirable location for corporations, how low the country's tax rate is and what taxation and economic ...
  3. What is the history of binary options?

    Discover the history of binary options trading, which is now one of the fastest growing investment market vehicles available ...
  4. How did Richard Branson make his fortune?

    Learn how Virgin Group tycoon Richard Branson earned his billions. Follow his journey from Virgin Records to the corporate ...
Trading Center