Cash flow to debt ratio : Meaning, Formula and Example

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The cash flow to debt ratio indicates the company’s ability to cover the total debt with its annual cash flow from operations. A high cash flow to debt ratio puts the company in a strong position to cover its total debt.

Formula for Cash flow to debt ratio

\[Cash\,flow\,to\,debt\,ratio = \frac{{Operating\,cash\,flow}}{{Total\,debt}}\]

Example

Sun Pharma has cash flow from operations of Rs.8,145 and total debt (short term and long term) is Rs.22,005. This gives a cash flow to debt ratio of 0.37. A cash flow to debt ratio of 0.37 indicates that it will take the company over three years (i.e., 3.7 times) to cover its total debt. This number can be compared to industry averages or other companies to compare debt loads.