How this calculator works
The cash flow to debt ratio divides the cash a business generates from operations by its total debt. Lenders and credit analysts use it to judge how quickly the business could clear its borrowings if it put all of its operating cash toward them. Because the numerator is a yearly cash flow, the ratio is a rate per year: 0.4 means the cash flow would repay 40 per cent of the debt in a year, or the debt would take 2.5 years to clear. A negative operating cash flow makes the ratio negative, which signals that the business is burning cash rather than repaying debt.
Formula
Cash flow to debt ratio = operating cash flow / total debt. Debt to cash flow ratio = total debt / operating cash flow = 1 / (cash flow to debt ratio). Total debt = short term debt + long term debt.
Worked example
Operating cash flow of $200,000 against $500,000 of debt gives a ratio of 0.4, or 40 per cent. The inverse, debt to cash flow, is 2.5 years. If the debt is $100,000 short term and $400,000 long term, the components add to the same $500,000.
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Frequently asked questions
Which debt should be included?
Include interest-bearing borrowings: bank loans, bonds, leases and notes. Trade payables and accrued wages are usually excluded because they are operating obligations rather than financing. Be consistent between years if you are tracking the trend.
Is a high ratio always good?
A high ratio means strong repayment capacity, but a very high one can mean the company is financing itself almost entirely with equity. Compare with the industry and with the direction of the trend over several years.
Why use operating cash flow rather than net income?
Operating cash flow is harder to manipulate than accounting profit and reflects cash actually generated. Net income includes non-cash accruals that do not help repay debt.