Cash Dividend Coverage Ratio

Definition: Cash Dividend Coverage Ratio is used to assess the firm`s ability to pay dividends and is calculated by dividing cash flows from operating activities by dividends paid. A higher ratio is better and it indicates that the firm has stronger ability to pay cash dividends.

Formula:
Cash Dividend Coverage Ratio = Operating cash flow per share / dividend per share
Or = Net cash flow from operating activities / Cash Dividend

Learn how to calculate the ratio with the following examples:

Example 1:
Tomson Ltd has the following data:
Cash Flows from Operation Activities $68,000
Total dividends paid $70,000
Then,
Cash Dividend Coverage Ratio = 68,000 / 70,000 = 0.97

Example 2:
Rubber plc has the following data for the year ended 31 December 2010:
Cash received from customers $82,000
Cash paid to employees $35,000
Cash paid to suppliers $25,000
Dividend paid $42,000

Then,
Net cash flow from operating activities = 182,000 - 35,000 - 25,000 = $122,000
Cash Dividend Coverage Ratio = 122,000 / 42,000 = 2.9
This indicates that the company is generating almost three times the amount of cash needed to cover its dividends payment in 2010.

* Next: Cash Turnover Ratio Analysis
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Kelvin Wong Loke Yuen is an experienced writer with a strong background in finance, specializing in the creation of informative and engaging content on topics such as investment strategies, financial ratio analysis, and more. With years of experience in both financial writing and education, Kelvin is adept at translating complex financial concepts into clear, accessible language for a wide range of audiences. Follow him on: LinkedIn.

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