Cash Coverage Ratio Calculator

Historical Background

The cash coverage ratio is a financial metric that gauges a company’s ability to meet its interest obligations with available cash flow. It indicates how many times the company's operating cash flow can cover its interest expenses. This ratio is crucial for evaluating financial health, especially when a company relies heavily on debt financing.

Formula

The formula to calculate the cash coverage ratio is:

\[ \text{CCR} = \frac{\text{EBIT} - \text{NCE}}{\text{IE}} \]

where:

• CCR: Cash Coverage Ratio
• EBIT: Earnings Before Interest & Tax
• NCE: Non-Cash Expenses
• IE: Interest Expenses

Example Calculation

Assume a company has an EBIT of $120,000, non-cash expenses of $20,000, and interest expenses of $30,000. The cash coverage ratio would be calculated as:

\[ \text{CCR} = \frac{120,000 - 20,000}{30,000} = \frac{100,000}{30,000} \approx 3.3333 \]

This result means that the company can cover its interest expenses about 3.33 times with its cash flow, indicating a good ability to service its debt.

Importance and Usage Scenarios

This ratio is significant because it helps assess a company's financial health and risk level. A high ratio implies better ability to meet debt obligations, reducing the likelihood of default. Conversely, a low ratio signals potential financial distress. Investors, creditors, and analysts use the cash coverage ratio to make informed decisions about a company's creditworthiness and investment attractiveness.

Common FAQs

1. What is a cash coverage ratio?

   • The cash coverage ratio measures the available cash to pay interest expenses. The higher the ratio, the larger the amount of cash available for each unit of interest expense.

2. What is a good cash coverage ratio?

   • A ratio above 1 is considered good, indicating that a company can cover its interest expenses with cash flow. Higher ratios reflect better financial stability.

3. Why is EBIT used in this calculation?

   • EBIT represents a company's profit from its core operations, providing an accurate measure of operational profitability without the influence of financing and taxation factors.