What Does Cash Available For Debt Service Mean?

Cash Available For Debt Service (CADS) is a ratio that measures the amount of cash a company has on hand relative to its debt service obligations due within one year. Debt service obligations include all current interest payments and current principal repayments. Sometimes lease obligations are part of the denominator.

Understanding Cash Available For Debt Service (CADS)

Lenders obviously prefer a company to have a high CADS ratio; the higher the ratio, the more of a cash cushion the company has to fund its upcoming debt service payments. In other words, the higher a company's CADS ratio, the less likely the company will be to default on its debts. For shareholders of a company, the desire is for an 'optimal' CADS ratio, not necessarily a high ratio. Shareholders consider the balance of CADS that keeps the company on sound solvency footing with the imperative of management deploying cash effectively—for any combination of capital expenditures, dividend payments, share repurchases—in an attempt to maximize returns for these owners of the firm.

CADS is not separately listed on a company's balance sheet. Instead, CADS, or cash flow available for debt service (CFADS), as a ratio may appear as a covenant in the debt agreement with the lender along with other debt service coverage ratios (DSCR).