What is Cash Flow to Debt Ratio?
Cash flow to debt ratio is a measure of a company’s ability to pay off its debt using its operating cash flow. It is calculated by dividing the cash flow from operations by the total debt of the company. A higher ratio indicates that the company can generate enough cash to cover its debt obligations, while a lower ratio suggests that the company may struggle to meet its debt payments.
How to Calculate Cash Flow to Debt Ratio in Excel?
To calculate cash flow to debt ratio in excel, you need to have the following data:
- Cash flow from operations: This is the amount of cash generated by the company’s core business activities. You can find it in the statement of cash flows or calculate it by adjusting the net income for non-cash items and changes in working capital.
- Total debt: This is the sum of the company’s short-term and long-term debt. You can find it in the balance sheet or calculate it by adding the current portion of long-term debt, notes payable, bonds payable, and other debt obligations.
Once you have the data, you can use the following formula to calculate the cash flow to debt ratio in excel:
=Cash flow from operations / Total debt
Example of Cash Flow to Debt Ratio in Excel
Let’s assume that you want to calculate the cash flow to debt ratio for Company A, which has the following data:
- Cash flow from operations: $350,000
- Total debt: $1,500,000
Using the formula above, you can calculate the cash flow to debt ratio in excel as follows:
=350000 / 1500000
The result is 0.23 or 23%, which means that Company A can pay off 23% of its debt using its operating cash flow in one year.
You can also use an excel table to display the data and the calculation, as shown below:
| Cash flow from operations | Total debt | Cash flow to debt ratio |
|---|---|---|
| $350,000 | $1,500,000 | 23% |
Other Approaches to Calculate Cash Flow to Debt Ratio in Excel
Besides using cash flow from operations, you can also use other cash flow measures to calculate the cash flow to debt ratio in excel, such as:
- Free cash flow: This is the amount of cash left after deducting capital expenditures from cash flow from operations. It represents the cash available for debt repayment, dividends, and other purposes.
- EBITDA: This is the earnings before interest, taxes, depreciation, and amortization. It is a proxy for the cash flow generated by the company’s operations, but it does not account for changes in working capital and capital expenditures.
To use these measures, you need to replace the cash flow from operations in the formula with the corresponding cash flow measure. For example, to use free cash flow, you can use the following formula:
=Free cash flow / Total debt
However, these measures may not be as accurate as cash flow from operations, as they may include or exclude some cash items that affect the company’s ability to pay off its debt. Therefore, it is advisable to use cash flow from operations as the default measure for the cash flow to debt ratio in excel.
