This is a complete guide on how to calculate Current Cash Debt Coverage ratio with in-depth interpretation, example, and analysis. You will learn how to use its formula to evaluate a company’s solvency.

Definition - What is Current Cash Debt Coverage Ratio?

If you want to invest in a stock, then it's critical to assess its state of solvency.

Establishing if that company can pay off its debt or not is just as vital, you can determine that by calculating the current cash debt coverage ratio, or the current cash flow to debt ratio.

That's important no matter if you are an investor or a creditor. Still, as an investor, you are more likely to analyze these numbers, as they interest you most.

Simply put, the current cash debt coverage ratio shows you a company's current operating cash flow (OCF) in relation to its current debt obligations.

In other words, it indicates the firm’s capability of paying its short-term debt in the upcoming years from its cash flow from operations.



This ratio formula is similar to that of the cash flow to debt ratio; the only difference is that it takes the company’s current liabilities into account, instead of the total debt.

You can arrive at this ratio by dividing the net cash derived from operating activities by the average current liabilities.

Current Cash Debt Coverage Ratio Formula 1

Current Cash Debt Coverage Ratio = Operating Cash Flow / Average Current Liabilities

Current Cash Debt Coverage Ratio Formula 2

You can easily find the cash flow from operating activities on the company’s cash flow statement, and the current liabilities on its balance sheet.


Now that you know the exact formula for finding this ratio, let’s dive into a quick example.

For example, you are looking to evaluate a debt-repayment capacity of Company U.

Looking into its financial statements, you find the following information:

  • Cash Flow from Operating Activities = $1,000,000
  • Current Liabilities at Beginning of Year = $200,000
  • Current Liabilities at End of Year = $300,000

So how do you calculate this company’s current cash debt coverage ratio?

First, we’ll calculate the average current liabilities, like so:​

Current Cash Debt Coverage Ratio Calculation 1

Next, we simply plug the average current liabilities and the operating cash flow into the given formula, as follows:

Current Cash Debt Coverage Ratio Calculation 2

The ratio of 4.00 tells us that Company U could easily cover its short-term debt by using one-fourth of its operating cash flow.

In other words, the company is generating enough cashflow to pay off its short-term debt.​

Interpretation & Analysis

The current OCF to debt ratio measures a company’s capability of maintaining its short-term debt levels on track. That’s why getting a high ratio is always better than getting a low one.

A high ratio highlights that there is income available for covering debt servicing. That means the company doesn’t have to sell off its assets, use savings or borrow more money to stay on track.

What’s a good current cash debt coverage ratio?

A current cash debt coverage ratio of 2.0 or higher is thought to be an excellent indicator of a company’s financial stability.

A ratio of less than 1.0 might be problematic, considering that the most minimal reduction in earnings could determine the company to become financially overwhelmed, leading to possible complications.

Cautions & Further Explanation

The current cash flow to debt ratio can provide you with useful insights into a company’s financial situation; however, bear in mind that it tells only one side of the story. This means that this ratio also has its limitations, as well.

In other words, this ratio evaluates a company’s performance in a given timeframe, most of the time in the past.

This means that we cannot depend entirely on it for indicating the company’s stability and potential future.

An example would be an innovative start-up, which is bound to grow quickly. This way, it enhances its capability of paying off the debt over time.

In short, you should use this ratio with other debt ratios, such as the asset coverage ratio, interest coverage ratio, or fixed charge coverage ratio, for getting a broader view of a company’s debt settlement capacity.


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