We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.
Accounting

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

What Are the Advantages of the Current Cash Debt Coverage Ratio?

Helen Akers
By
Updated: May 16, 2024
Views: 8,635
Share

The primary advantage of the current cash debt coverage ratio is that it reveals a company's ability to meet its current debt obligations. It is found by taking a company's cash flow from operations and dividing it by current liabilities. Secondary advantages of the ratio include the fact that it measures liquidity based on the beginning and ending of a fiscal year and is more accurate at predicting a company's ability to pay its financial obligations.

Companies need a net positive cash flow from sales operations in order to survive. In the short-term, a lack of adequate liquidity can force a business to borrow more than it is capable of repaying or sell off assets in order to shrink, rather than expand operations. The current cash debt coverage ratio reflects how many times a company would be able to repay its current liabilities from its current net cash flow. This is an advantage to investors who need an accurate picture of a company's financial position.

Investors often look at whether a company has financial promise since buying stock, bonds or giving a substantial private investment carries the risk of not seeing a future return. The current cash debt coverage ratio is a way to get a quick snapshot of a firm's ability to fund its own existence, without having to examine and interpret pages of detailed financial statements. A low or negative ratio can indicate problems with a firm's strategy or market acceptance of its products and services. Since investors are owed future payments in the form of dividends or a lump sum when they sell their stocks and bonds, a solid current cash debt coverage ratio is a good indicator that they will be paid.

Another advantage of the ratio is that it shows the company's current ability to meet its debts. It shows how much cash flow a company generated relative to the amount of liability payments it needed to meet. This can benefit investors since they may sell their stake in the company at any time. The ratio can provide a greater level of accuracy as it isolates the cash received from operations during the past year and the amount of regular debt payments incurred from loans, orders from vendors, and maintaining property and equipment.

A healthy current cash debt coverage ratio should reflect a higher number on the left side, which represents cash, or at least a number that matches the number on the right side, which represents debt. The benchmark for a company with adequate liquidity is often 1:1. Depending upon the company's industry, what is considered an acceptable figure may vary. Some industries average a higher net cash flow relative to debt than others, such as those with an online selling platform, as these businesses typically incur low overhead costs.

Share
SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Helen Akers
By Helen Akers
Helen Akers, a talented writer with a passion for making a difference, brings a unique perspective to her work. With a background in creative writing, she crafts compelling stories and content to inspire and challenge readers, showcasing her commitment to qualitative impact and service to others.
Discussion Comments
Helen Akers
Helen Akers
Helen Akers, a talented writer with a passion for making a difference, brings a unique perspective to her work. With a...
Learn more
Share
https://www.smartcapitalmind.com/what-are-the-advantages-of-the-current-cash-debt-coverage-ratio.htm
Copy this link
SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.

SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.