What is Debt Cash Flow?

Keith Koons
Keith Koons
Man climbing a rope
Man climbing a rope

Debt cash flow, also known as cash flow to debt ratio, is a measure of a company’s incoming funding versus the total debt it has due. Investors use the debt cash flow ratio to ascertain whether or not it is safe to invest in a particular company. Analyzing cash flow to debt ratio helps investors decide whether or not a company will be able to pay off its debts in time. The ratio measures a firm’s debt against its non-equity cash flow or operating cash flow. A higher cash flow to total debt ratio is seen to be evidence that the company is financially healthy, whereas a lower cash flow is indicative of low revenues or high dependence on credit.

Large companies, especially capital-intensive firms, invariably have more debt then they have incoming cash flow. In fact, rolling credit is often a standard practice amongst large corporations. Before investing in such firms, it is important for the investor to know what the company’s liabilities are and how well it is positioned to handle its arrears. Debt cash flows gives investors a mathematical index to measure a firm’s ability to handle its debts without defaulting or incurring more debt by resorting to additional loans. Since it is a simple ratio, small-time investors and serious brokers alike can use the index without much interpretation.

The debt cash flow ratio is essentially the total operating cash flow of a company divided by the total debt that the company has incurred. Total operating cash flow is defined as the total amount transacted by the company excluding the firm’s equity, which is the portion of the company owned by the public. Calculating the total debt is a little more complicated. It is a mixture of a firm’s short-term loans and its long-term debts and the period of each loan and interest. Cash flow to debt ratios are usually tweaked by analysts to take other financial indicators into consideration.

A high debt cash flow ratio means that company is well-positioned to pay back its loans on time. It is unlikely that a firm is ever debt-free; regardless, it is important that companies pay back their loans without defaulting for their operations to remain profitable. On the other hand, low debt cash flow ratios imply that a company may have trouble paying back its loans. When an economy slows down, cash flows dry up, but debts do not disappear, so the debt cash flow ratio is often employed to deduce how well a company will do in rough economic conditions.

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Discussion Comments


No ratio goes without certain norms, or what is considered good and what isn't. Although large variations exists between different industries, most commonly I believe, the operating cash flow to debt ratio can be seen as 'good' already when between 0.5-0.6. That is, a 50 or 60 percent indicator should be enough to cover short-term borrowings and long-term debt that is to be serviced in the ongoing period, also possibly leaving room for the annual dividend payment.

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