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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