Current Cash Debt Coverage Ratio: Definition, Formula, Calculation, Example, Interpretation, Meaning

Subscribe to newsletter

Solvency ratios are financial metrics that measure a company’s ability to meet its long-term debt obligations. They provide insights into a company’s financial strength and ability to repay debts over an extended period. Typically, solvency ratios assess the relationship between a company’s total debt and its equity or assets and indicate the proportion of debt in capital structure.

Several solvency ratios are crucial for both companies and stakeholders. One includes the current cash debt coverage ratio, an extension of the cash debt coverage ratio.

What is the Current Cash Debt Coverage Ratio?

The cash debt coverage ratio is a financial metric used to evaluate a company’s ability to repay its debt using its operating cash flow. Companies can calculate it by dividing the operating cash flow by the average total debt during a specific period. Similarly, they can extend this ratio to calculate the current cash debt coverage ratio. This ratio uses current cash and current liabilities in the formula instead.

Subscribe to newsletter https://harbourfrontquant.beehiiv.com/subscribe Newsletter Covering Trading Strategies, Risk Management, Financial Derivatives, Career Perspectives, and More

The current cash debt coverage ratio measures how efficiently a company manages its cash resources. It gauges how much a company can cover its current liabilities using the cash it generates from its operations. Therefore, it is a crucial ratio in assessing a company’s solvency in the short term. Both investors and companies can use this ratio.

How to calculate the Current Cash Debt Coverage Ratio?

Companies can use the following formula for cash debt coverage ratio to measure their cash management efficiency.

Cash debt coverage ratio = Operating cash flow / Total debt

However, the current cash debt coverage ratio focuses on a more short-term approach. As stated above, it modifies the above formula to achieve that. Therefore, the formula for the current cash debt coverage ratio becomes:

Current cash debt coverage ratio = Current cash flow / Current liabilities

Some companies may also use the average current liabilities in the above formula. This average comes from the opening and closing balances of these liabilities.

Example

A company, Red Co., has a current cash flow of $500,000. The company had current liabilities of $200,000 at the beginning of the year and closed the balance at $300,000. Therefore, the average current liabilities for Red Co. are $250,000. Based on the above information, the current cash debt coverage ratio for Red Co. will be as follows.

Current cash debt coverage ratio = Current cash flow / Current liabilities

Current cash debt coverage ratio = $500,000 / $250,000

Current cash debt coverage ratio = 2 times

How to interpret the Current Cash Debt Coverage Ratio?

The current cash debt coverage ratio can be above or below 1. If it is the former, it means the company has more cash than its current liabilities. Usually, the higher this ratio is, the better it is for the company. It means the company has significant cash resources to cover its current liabilities. However, too high of a current cash debt coverage ratio may also imply the company is not utilizing its cash resources properly.

Similarly, if the current cash debt coverage ratio is lower than 1, the company may suffer in paying its current liabilities. It is a concern as it might indicate inefficient cash management from the company. However, users must still view this ratio comparatively to understand the acceptable current cash debt coverage ratio range.

Conclusion

The current cash debt coverage ratio measures how efficiently a company uses its cash resources. A ratio of higher than 1 implies the company can cover its current liabilities and still have some cash left. However, it is crucial to view the current cash debt coverage ratio comparatively. This ratio is one of the critical solvency ratios for both companies and investors.

Subscribe to newsletter https://harbourfrontquant.beehiiv.com/subscribe Newsletter Covering Trading Strategies, Risk Management, Financial Derivatives, Career Perspectives, and More

Further questions

What's your question? Ask it in the discussion forum

Have an answer to the questions below? Post it here or in the forum

LATEST NEWSInventronics Announces Option Grants
Inventronics Announces Option Grants

CALGARY, Alberta, May 20, 2025 (GLOBE NEWSWIRE) — Inventronics Limited (“Inventronics” or the “Corporation”) (IVX:TSX Venture) announces the grant of options to purchase common shares of the Corporation to members of the management team and Board of Directors of the Corporation. Each of the four…

Stay up-to-date with the latest news - click here
LATEST NEWSThrive Launches Compliance Center Offering Unrivaled Expertise
Thrive Launches Compliance Center Offering Unrivaled Expertise

Thrive Enables Organizations to Protect Data, Enhance Security, and Meet Regulatory Standards BOSTON, May 20, 2025 (GLOBE NEWSWIRE) — Thrive, a global technology outsourcing provider for cybersecurity, Cloud, and IT managed services, today announced its new Compliance Center. The Compliance Center provides mid-market businesses and…

Stay up-to-date with the latest news - click here
LATEST NEWSnCino Unveils Transformative AI-Powered Banking Solutions at nSight 2025
nCino Unveils Transformative AI-Powered Banking Solutions at nSight 2025

Key nCino Platform enhancements released to help banks, credit unions, and IMBs gain a competitive advantage through intelligence-driven automation Company launches nCino Research Institute to deliver economic insights and actionable strategies for banking growth WILMINGTON, N.C., May 20, 2025 (GLOBE NEWSWIRE) — nCino, Inc. (NASDAQ:…

Stay up-to-date with the latest news - click here
LATEST NEWSBirchtech to Exhibit at American Water Works Association Annual “ACE 25” Conference from June 8-11, 2025
Birchtech to Exhibit at American Water Works Association Annual “ACE 25” Conference from June 8-11, 2025

Company to Showcase Novel Water Treatment Solutions for Potable Water CORSICANA, Texas, May 20, 2025 (GLOBE NEWSWIRE) — Birchtech Corp. (TSX: BCHT) (OTCQB: BCHT) (“Birchtech” or the “Company”), a leader in specialty activated carbon technologies for sustainable air and water treatment, today announced management will…

Stay up-to-date with the latest news - click here
LATEST NEWSKP Tissue Announces Filing and Mailing of the Management Proxy Materials in Connection with its 2025 Annual Meeting of Shareholders
KP Tissue Announces Filing and Mailing of the Management Proxy Materials in Connection with its 2025 Annual Meeting of Shareholders

Your vote is important no matter how many shares you own. Vote today. Shareholders who have questions or need assistance with voting should contact KP Tissue’s proxy solicitation agent and shareholder communications advisor, Laurel Hill Advisory Group, by telephone at 1-877-452-7184 or by email at…

Stay up-to-date with the latest news - click here

Leave a Reply