Cash Flow-to-Debt Ratio: Definition, Formula, and Example

What Is the Cash Float-to-Debt Ratio?

The cash flow-to-debt ratio is the ratio of a company’s cash movement from operations to its common debt. This ratio is one of those coverage ratio and can be used to come to a decision how long it would take a company to repay its debt if it devoted all of its cash movement to debt compensation. Cash movement is used moderately than income on account of cash movement provides a better estimate of a company’s ability to pay its tasks.

The Parts for the Cash Float-to-Debt Ratio 


Cash Float to Debt = Cash Float from Operations General Debt

get started{aligned} &text{Cash Float to Debt} = frac{ text{Cash Float from Operations} }{ text{General Debt} } end{aligned} ​Cash Float to Debt=General DebtCash Float from Operations​​

The ratio is way much less incessantly calculated the use of EBITDA or free cash movement.

Key Takeaways

  • The cash flow-to-debt ratio compares a company’s generated cash movement from operations to its common debt.
  • The cash flow-to-debt ratio indicates how so much time it would take a company to pay off all of its debt if it used all of its operating cash movement for debt compensation (although this is a very unrealistic scenario).

What the Cash Float-to-Debt Ratio Can Tell You?

While it is unrealistic for a corporation to devote all of its cash movement from operations to debt compensation, the cash flow-to-debt ratio provides a snapshot of all the financial smartly being of a company. A major ratio means that a company is very best able to pay once more its debt, and is thus able to take on further debt if essential.

Otherwise to calculate the cash flow-to-debt ratio is to try a company’s EBITDA moderately than the cash movement from operations. This option is used a lot much less incessantly because it comprises investment in inventory, and since inventory may not be purchased briefly, it’s not considered as liquid as cash from operations.

Without further information about the make-up of a company’s property, it is tough to come to a decision whether or not or no longer a company is as readily able to cover its debt tasks the use of the EBITDA way.

The Difference Between Unfastened Cash Float and Cash Float From Operations

Some analysts use free cash movement instead of cash movement from operations on account of this measure subtracts cash used for capital expenditures. The usage of free cash movement instead of cash movement from operations would perhaps, therefore, indicate that the company is way much less able to meet its tasks.

The cash flow-to-debt ratio examines the ratio of cash movement to common debt. Analysts once in a while moreover learn in regards to the ratio of cash movement to easily long-term debt. This ratio would perhaps provide a further favorable symbol of a company’s financial smartly being if it has taken on essential non permanent debt. In inspecting either one of the ones ratios, it is important to take into account that they vary extensively all the way through industries. A proper analysis will have to assessment the ones ratios with those of different companies within the equivalent industry.

Example of How to Use the Cash Float-to-Debt Ratio

Think that ABC Widgets, Inc. has common debt of $1,250,000 and cash movement from operations for the year of $312,500. Calculate the company’s cash movement to debt ratio as follows:


Cash Float to Debt = $ 3 1 2 , 5 0 0 $ 1 , 2 5 0 , 0 0 0 = . 2 5 = 2 5 %

get started{aligned} &text{Cash Float to Debt} = frac{ $312,500 }{ $1,250,000 } = .25 = 25% end{aligned} ​Cash Float to Debt=$1,250,000$312,500​=.25=25%​

The company’s ratio result of 25% means that, assuming it has forged, constant cash flows, it would take kind of 4 years to repay its debt since it would be able to repay 25% each year. Dividing the number one throughout the ratio finish end result (1 / .25 = 4) confirms that it would take 4 years to repay the company’s debt.

If the company had the following ratio finish end result, with its cash movement from operations higher relative to its common debt, this may increasingly indicate a financially stronger industry that may increase the greenback amount of its debt repayments if sought after.

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