Lesson 5 of 5 · 13 min
Cash flow coverage ratios
Coverage ratios divide CFO by what the company owes or wants to spend (debt, interest, new assets, repayments, dividends) to show how comfortably operating cash can pay for each.
In short
- Debt coverage = CFO ÷ total debt: financial risk and leverage.
- Interest coverage = (CFO + interest paid + taxes paid) ÷ interest paid. If an IFRS company puts interest paid in financing, do not add it back in the numerator.
- Reinvestment = CFO ÷ cash paid for long-term assets; debt payment = CFO ÷ cash paid for long-term debt repayment; dividend payment = CFO ÷ dividends paid.
- Investing and financing = CFO ÷ cash outflows for investing and financing activities: can operations pay for assets, debt and distributions all at once?
- Higher is safer for every coverage ratio; a value below 1 means operations alone cannot fund that item.
Unlock this lesson free for 7 days
Create a free account to get 7 days of full access — every lesson, video, flashcard, mock and the question bank. No card needed.