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

    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.
  2. 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.
  3. 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.
  4. Investing

    Cash Flow Statement and Financial Health

    A cash flow statement records the amounts of cash and cash equivalents entering and leaving a company.
  5. Investing

    Cash Flow From Investing

    Cash flow analysis is a critical process for both companies and investors. Find out what you need to know about it.
  6. 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.
  7. Investing

    What Is a Cash Flow Statement?

    Learn how the CFS relates to the balance sheet and income statement as a part of a company's financial reports.
  8. Investing

    Financial Ratios to Spot Companies Headed for Bankruptcy

    Obtain information about specific financial ratios investors should monitor to get early warnings about companies potentially headed for bankruptcy.
Frequently Asked Questions
  1. What is Common Stock and Preferred Stock?

    Learn about the differences between common and preferred shares. Explore situations where preferred shares have more favorable ...
  2. Can CareCredit be Used for Family Members?

    Learn more about the available options that CareCredit offers to pay for out-of-pocket medical procedures with little to ...
  3. What is a Wash Sale?

    The Wash-Sale rule was established to forbid a loss deduction of a security sold.
  4. Were Collateralized Debt Obligations (CDO) Responsible for the 2008 Financial Crisis?

    Collateralized debt obligations are exotic financial instruments that can be difficult to understand, Learn the role they ...
Trading Center