The Cash flow coverage ratio measures a company’s ability to pay long-term debt, which is otherwise called solvency. (The amount of cash available to pay the borrower’s interest expense.) It is useful for banks and creditors to evaluate the risk of nonpayment. It also helps you as the business owner to understand if you are in a good position to pay off your debt.
The formula to calculate this is
Cash flow from operations divided by total debt. (60,000 by 40,000 = 1.5) This means your company could pay off its debt 1.5 times with operating cash flow. The higher this number is, the more cash a company has to pay off its debt. A lot of larger corporations have a lower ratio because they can run their business through debt.
The Current Liability Coverage Ratio measures a company’s solvency.
The Current Liability Coverage Ratio measures a company’s solvency.