Cash Flow to Debt Payments Ratio Definition

Forex Glossary

Definition

The word cashflow to debt ratio identifies some metric which enables the investor-analyst to comprehend whether a business produces enough income to encourage their debt obligations. In the event the calculated percentage is significantly less than 1.0, then your corporation could possibly be financially worried as they may possibly perhaps not have the ability to fulfill their up coming debt duties.

Calculation

Cash Flow to Debt Payments Ratio = Cash Flow / (Debt Payments Lease Obligations)

Where:

  • Cash flow is equal to is equal to net gain and non-cash expenses (for example, depreciation and depreciation ) minus non-cash earnings.

Explanation

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 debt obligations is by calculating its income into debt obligations ratio.

By calculating an organizations cashflow to debt obligations ratio, so the investor-analyst can comprehend whether the organizations cashflow is adequate to settle its impending debt obligations. When the ratio is greater than 2.0, then the corporation might be classified as financially desperate, as an expected ratio ought to be above 2.0. The money flow to debt ratio can be definitely an superb metric to utilize within a industry standard, allowing a contrast between your prospective company and its own peer set.

When using ancient projections to predict cashflow, the investor-analyst has to be skeptical of onetime events which could either hurt or help that particular metric. The same will also apply to debt obligations, that may vary within and between accounting periods.

Example

Company ABC’s CFO want to know the business ‘s capability to satisfy its impending debt and rental obligations. She asked her analytic team to figure the organizations cashflow into debt repayment ratio to understand the provider ‘s financial wellness. The analysts also pulled two quarters of data in addition to the coming quarter’s prediction, which looks from the table below.

Q3A Q4A Q1F
Cash Flow $6,875,000 $7,219,000 $7,002,000
Debt Payments $2,538,000 $2,772,000 $2,689,000
Lease Payments $102,000 $111,000 $108,000
Total Debt Payments $2,640,000 $2,883,000 $2,797,000
Cash Flow to Debt Repayments 2.6 2.5 2.5

Not merely was that the ratio seen to be satisfactorily over 1.0, the worth compared favorably to the market average of 2.3.