Cash Debt Coverage: how to analyze it?
š¤ Is the current portion of DEBT covered by the actual daily activity āearningsā? What about the long-term portion as well? Which Liabilities should be considered? ā“
ā The Cash Debt coverage can show if the actual cash coming from the operating activities is enough for the short and long-term portion of debt that has to be paid.
š© Itās generally calculated by dividing the cash generated from the ordinary activities by the liabilities, or better, by the debt amounts.
šļø If only the coverage of current portion of debt is analyzed, we put the average current liabilities in the denominator: these are not, in truth, all the current liabilities that we find in the balance sheet: we can choose the actual short-term debt amounts, or, going from exclusion, keeping out the current liabilities that have been recorded for āpureā accounting purposes.
If we want to analyze all the debt coverage, long-term amounts due should be added up.
š In both cases, the numerator is represented by the cash flow originated from the daily business activities, which is given by + Revenues ā Expenses ā how much money clients still have to pay for goods or services already provided + what the company still owes to suppliers for those expenses ā the possible increase in inventory (if itās a manufacturing firm).
š° If all the debt is considered, itās very difficult to find a ratio equal to 1 ā that means itās hard to have (yearly) operating cash flows that can cover all the debt outstanding. Thatās where the analysis of financing resources comes in handy: how is the gap going to be filled? With new money coming from lenders, banks, owners, etc.?
ā Do you know how to handle these sit
uations? Let us know!
