Cash flow coverage ratio

Method of calculation

Ratio's description

This ratio is used to assess the ability of the company to cover debt (principal repayment and interest) with the generated financial surplus (net profit and amortisation). The analysis of this ratio is particularly justified when the increase of debt results from the increase of liabilities generating interest (in terms of financial costs). If the financial surplus is not sufficient to cover the principal repayment and interest, the company has to look for other sources of financing the liabilities resulting from debt (meaning other sources of cash generation).

Ratio's interpretation

• Ratio's values below 100% are assessed negatively and interpreted as insufficient level of financial surplus (i.e. currently available cash) to cover the debt, which means higher debt capacity.
• The higher the values above 100%, the better the ability to cover debt with financial surplus.
• When assessing the changes in ratio's value over time (over few periods):
  • the decrease of ratio's value (in particular decrease below 100%) is interpreted as a negative phenomenon, meaning that the financial surplus (being the base of current cash creation) covers debt to a decreasing extent (its sufficiency for debt coverage drops),
  • the increase of ratio's value is interpreted as a positive phenomenon, meaning that the financial surplus (being the base of current cash creation) covers debt to an increasing extent (its sufficiency for debt coverage grows).