Cash Flow Coverage Ratio
Cash Flow Coverage Ratio measures the ability of the company's operating cash flow to meet its obligations, including its liabilities or ongoing concern costs.
It is an important indicator of the liquidity position of a company. The Cash Flow Coverage Ratio is often used by the banks to decide whether to make or refinance any loan.
Calculation of Cash Flow Coverage Ratio
There are different formulas used for the calculation of this ratio. Some of the most commonly used formulas are given below.
This formula also has some variations. For example, free cash flows can be used instead of operating cash flows. Another formula used for the calculation of Cash Flow Coverage Ratio is
Interpretation of Cash Flow Coverage Ratio
The Cash Flow Coverage Ratio tells the number of times the financial obligations of a company are covered by its earnings. The larger the operating cash flow coverage for these items, the greater the company's ability to meet its obligations.
A good Cash Flow Coverage Ratio also indicates that the company has cash flow to expand its business, withstand hard times, and not be burdened by debt servicing and the restrictions typically included in credit agreements.
A ratio of less than one indicates that there is not enough cash flow to cover loan payments and that bankruptcy is likely within two years if it fails to improve its financial position.
|The Debt-Service Coverage Ratio (DSCR) is a
benchmark used to measure the cash producing ability of a
business entity to cover its debt payments.
||Debt Coverage Ratio measures the ability of a
company to meet its debt servicing obligations. It is
an important indicator of the liquidity position of a
||Fixed-Charge Coverage Ratio sheds light
on a company’s ability to satisfy fixed financing expenses
such as interest and leases
|Asset Coverage Ratio provides a snapshot of
the financial position of a company by measuring its
tangible and monetary assets against its financial
||Quick Ratio provides a measure of a company's
ability to meet its short-term obligations using its most
||Cash Ratio is the ratio of a company's cash
and cash equivalent assets to its total liabilities.