Question

What are the formulas for the follow and how are they interpreted?

a) Current cash debt coverage

b) Cash debt coverage

c) Free cash flow

Answer 1

a) Current cash debt coverage :

Current cash debt coverage ratio is a liquidity ratio that is used to measure how efficient the entity is with its cash management.

It shows the company’s relation to the operating cash flow received during an accounting period with the current liabilities it needs to clear.

Formula: How To Calculate Current Cash Debt Coverage Ratio

Current cash debt coverage ratio is calculated by extracting the net cash flow from operating activities from the Statement of Cash flow and then, dividing it by average liabilities of the company.

Current cash debt coverage ratio formula :

Net cash provided by operating activities ÷ Avg current liabilities

2)

Cash debt coverage ratio :

It shows how much of the company’s total liabilities can be covered (paid) with net cash from operating activities. In other words, this ratio is one of the measures of the company’s financial flexibility and stability. This ratio is calculated by dividing net cash provided by operating activities by the average total liabilities.

Cash debt coverage ratio =

operating cashflows ÷ Total liabilites

3) Free Cash Flows :

Free cash flow is the cash a company produces through its operations, less the cost of expenditures on assets. In other words, free cash flow is the cash left over after a company pays for its operating expenses and capital expenditures.

To calculate FCF, from the cash flow statement, locate the item cash flow from operations (also referred to as "operating cash" or "net cash from operating activities"), and subtract the capital expenditure required for current operations.

The formula for free cash flow is :

​ Operating Cash Flow − Capital Expenditures

where, FCF=Free Cash Flow

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