Cash Debt Coverage Ratio
‘Cash debt coverage ratio’ (also known as ‘current cash debt coverage ratio’) measures company’s ability to repay its debts. Basically, it compares cash flow that is received from operations to liabilities of the company. Higher ratio means higher financial stability of the company.
If company’s debt coverage ratio is very low, it may indicate real risks that company is facing. However, even highly indebted companies can continue their business successfully as long as financial market conditions are allowing that. But such companies may get in trouble if funding opportunities would change in the market and interest rate for loans would rise significantly and also large debts of the company would mature at the same time - it could bring company in really troubled situation.
There are many other similar ratios that could help in solvency analysis. The most popular ratios are ‘interest coverage ratio’ and ‘EBITDA coverage ratio’, but other ratios as ‘times interest earned ratio’ or ‘cash coverage ratio’ also can be applied.
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