This ratio is a ‘hybrid’ ratio as it includes items from two
different financial statements – your balance sheet and your cash flow
statement (in direct form). Financial
ratio analysis uses mostly direct form of CFS so it is advisable to prepare it
using both direct and indirect method.
Current Cash Debt Coverage Ratio is calculated by dividing
your net cash flow from operating activities by your average current liabilities
for the same period. Thus, it indicates the ability of your business to pay its
current liabilities from its operations. Which makes it a solid liquidity
metric.
Obviously, a higher current cash debt coverage ratio
indicates a better liquidity position. Generally a ratio of 1:1 is considered
very comfortable because it means that your business is able to pay all of its current liabilities from the
cash flow of its own operations.
No comments:
Post a Comment