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.

Cash Flow Coverage Ratio

Cash Flow Coverage Ratio (or Cash Coverage Ratio) measures the ability of the company's operating cash flow to meet its obligations, including its liabilities or ongoing concern costs.

The Cash Flow Coverage Ratio is an important indicator of the liquidity position of a company. It is often used by the banks to decide whether to make or refinance any loan.

 


Cash Flow Coverage Ratio Formula

There are different formulas used for the calculation of the Cash Flow Coverage Ratio. Some of the most commonly used formulas are given below.

Operating Cash Flow Coverage Ratio formula. Free cash flows can also be used.

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

Alternate Cash Coverage Ratio formula

Cash Flow Coverage Ratio Interpretation

The Cash Flow Coverage Ratio indicates 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 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 Cash Flow Coverage 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.


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