Cash Flow to Debt Ratio Analysis

Definition: Cash Flow to Long Term Debt Ratio compares the operating cash flow of a firm to its total debt (which includes short-term debt, the current portion of long-term debt and long-term debt). This indicates the firm's ability to cover total debt payment with its cash flow generated from operating activities.

Cash Flow to Debt = Cash flow / Total debt

Example 1:
Golden Industries Ltd had operating cash flow of $200,000 (as recorded in the statement of cash flows), and total debt of $280,000 (as recorded in balance sheet). Thus the cash flow to debt ratio would be: 200,000 / 280,000 = 0.7143 = 71.43%.

Example 2:
Calculate the Cash Flow to Debt ratio for TT Suppliers Ltd, given the following data:
Operating cash flows $500,000
Long-term debt $280,000
Short-term debt $300,000

Total debt = 280,000 + 300,000 = $580,000
Cash Flow to Debt = 500,000 / 580,000 = 0.8621 = 86.21%

* Next: Operating Cash Flow Per Share