Cash Flow Coverage Ratio Definition

Forex Glossary


The term cashflow coverage ratio identifies some metric which lets the investor-analyst to comprehend the capacity of a business to fulfill most its non-expense expenses. Cases of non-expense costs comprise capital expenditures, dividend payments, and payment of the debt.


Cash Flow Coverage = (Debt Payments Dividends Capital Expenditures) / Cash Flow for your Period

  • Cash Flow to your Period is equivalent to net gain and non-cash expenses without non-cash earnings.
  • Non-cash expenses are corresponding to depreciation and depreciation expense.


Cash flow measures permit the investor-analyst to comprehend whether the business is generating enough income from ongoing operations to continue to keep the company in a financially sound position within the extended run. One of those techniques to comprehend the power of a business to fulfill its own non-expense-related obligations is to figure their cashflow coverage ratio.

The investor-analyst can calculate an organizations cashflow coverage ratio should they would like to comprehend whether an organizations is generating enough money to cover non-expense expenses. This step supplements metrics like fixed charge policy and is of specific interest when assessing firms which are rapidly expanding concerning funding projects or businesses which happen to be heavily indebted.

The term carries the total amount of non-expense costs like the payment of money, stock dividends, and capital expenditures and divides by the cashflow generated at precisely the exact same period. Cashflow for the time could be corresponding to this provider ‘s online gain and non-cash expenses (for example, depreciation and amortization), without non-cash earnings. Ideally, a business ‘s ratio could be over 1.0; nonetheless the investor-analyst must carefully consider the essence of debt obligations utilised in the analysis. That is particularly valid when the company comes with a remarkably big debt payment expected from the time tested.


Company ABC’s CFO is more worried with the corporation ‘s capability to generate enough dollars to cover the upcoming debt obligations and intended funding expansion expenses. Even the CFO asked her analytic team to compute the organizations cashflow coverage ratio. The analysts noted that the provider has upcoming debt obligations of $2,250,000, dividends of $750,000, also contains proposed for about $ 2,000,000 in funding expenses. Net gain in the time is estimated to be $4,250,000, together with depreciation expense of $500,000 and $50,000 in non-cash earnings.

Calculating the money flow coverage ratio:

= ($2,250,000 $750,000 $2,000,000) / $ ($4,250,000 $500,000 – $50,000)
= 5,000,000 / $4,700,000, or 1.06

Based upon the advice, the CFO asked surgeries to postpone half of their funding expansion plans prior to the subsequent year; leading into a cash flow coverage ratio of 0.85.

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