Cash Flow to Debt Ratio Calculator


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Analyze the liquidity of any company with the help of Calcopolis.

The cash flow to debt ratio calculator is a tool that allows you to measure the company's cash flow from operations in relation to its total debt.

From an investor's point of view - this metric reveals crucial information about the company's health and indicates if the company can repay its debt and pay dividends.

In this article, we explain what the cash flow to debt ratio is. How it can be calculated, and how to interpret the results.

What is the cash flow to debt ratio?

The cash flow to debt ratio is a financial metric representing a company's ability to repay its debt using cash flow from its operations.

Note that the metric is based on cash flow, not net income, since cash flow better represents the company's liquidity. 

Amortization and depreciation often affect net income, so many investors prefer using EBITDA

How to calculate the cash flow to debt ratio?

The calculation of the cash flow to debt ratio is pretty straightforward. Simply follow the procedure.

  1. Find the cash flow from operations in the company cash flow statement. Alternatively, visit our Free Cash Flow Calculator, a handy tool for calculating a company's cash flow.
  2. Calculate the total debt by summing up short-term and long-term liabilities. 
  3. Substitute the values to our calculator or use the formula below.

The Cash Flow to Debt Formula

The equation for calculating the cash flow to debt ratio looks as follows:

CDR = Operating Cash Flow / Total Debt

Where:

  • Operating Cash Flow - cash flow from operations
  • Total Debt - the sum of short-term and long-term liabilities

How to interpret this metric?

Correctly interpreting the cash flow to debt ratio requires trend analysis over several fiscal periods. Since two factors impact its value, there will be four possible scenarios.

Operating cash flow increasing, total debt decreasing.

It is a positive sign of a healthy company. Cash flow generated from business operations allows one to repay the debt and invest in future growth.

Such a company is a good investment candidate (upon further analysis). The growing cash flow indicates good dividend prospects and can herald future market capitalization growth.

Operating cash flow decreasing, total debt decreasing.

Although a decrease in the company's liabilities is a good sign, the fall in operating cash flow requires a more profound analysis.

Clearly, in this case, deleveraging of the company comes at the expense of cash flow and may negatively affect future growth prospects.

However, in the case of growing interest rates and increasing weighted average capital costs, it may be a good move.

Operating cash flow decreasing, total debt increasing.

It is a harbinger of severe troubles for the company. The drop in cash flow makes repaying the debt more and more difficult. 

Companies encountering this scenario may not be able to pay dividends and face a real threat of bankruptcy. However, this case may occur when the management decides to perform intense investments, which may radically improve the situation in the long term.

Operating cash flow increasing, total debt increasing.

It is a case of a company that fuels its growth by raising debt. Growing cash flow indicates that raised capital is invested wisely. However, the company's liquidity should be closely monitored.

Other tools

This calculator is one of many tools available on Calcopolis that help you evaluate a company's financial health. 

The cash ratio calculator tells you if a company can quickly deleverage itself by repaying short-term liabilitis using available cash.

For a more in-depth analysis of potential investmest, you may use Enterprise Value Calculator to estimate the current company's value and compare it with its growth potential using the PEG Ratio Calculator and Present Value of Growth Opportunities.


Authors

Created by Lucas Krysiak on 2022-09-30 12:33:04 | Last review by Mike Kozminsky on 2022-10-14 15:30:35

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