Coverage Ratio establishes relationship between the company’s financial obligations with the available resources to pay them off. In simple terms, it measures the ability to repay the liabilities of an entity. Copy the link given below and paste it in new browser window to get more information on Cash Coverage:- http://www.transtutors.com/homework-help/corporate-finance/financial-statement-analysis/ratio-analysis/long-term-solvency-measures/cash-coverage/

1. Cash Coverage

2. Meaning of Coverage Ratios
Coverage ratios establish relationship between the company’s financial
obligations with the available resources to pay them off.
Common Ratios
 Interest Coverage ratio
 Debt Service Coverage ratio
 Asset Coverage ratio

3. Meaning of Cash Coverage
Cash coverage is the company’s financial
flexibility, stability and its ability to meet its
financial obligations as they fall due.
Value of cash coverage ratios
• These are indicators of an entity’s
repayment ability in short-term and long-
term
• These can be compared against past
trends, industry norms or industry peers
• They should be interpreted with other
quantitative and qualitative information

4. Cash Ratio
This is a stringent and conservative
ratio to consider only cash, cash
equivalents and short-term
investments as the liquid assets
that is available to repay current
liabilities in an entity.
Formula
Cash Ratio = Cash + Cash equivalents + Short-term investments
Current Liabilities

5. Cash debt coverage ratio
Net cash-flow from Operating activities can be
checked from the Cash-flow Statement or the
recalculated EBITDA be used.
This measures the entity’s ability to repay its total
liabilities using the cash generated by its operating
activities in the normal course of the business.
Higher the ratio, it is less probable to use the entity’s
current assets to meet its total liabilities. Instead these
can be covered using the net cash-flow from
operating activities in the normal course of business.
Formula
Cash Debt Coverage ratio= Net Cash-flow from Operating activities
Average Total Liabilities

6. Current cash debt coverage ratio
This measures the entity’s ability to repay
its total current liabilities using the cash
generated by its operating activities in the
normal course of the business.
Higher the ratio, it is less probable to use
the entity’s current assets to meet its total
current liabilities. Instead these can be
covered using the net cash-flow from
operating activities in the normal course of
business.
Formula
Current Cash Debt Coverage ratio= Net Cash-flow from Operating activities
Average Total Current Liabilities

7. Downfalls of Cash Coverage ratios
 Excess money indicates poor utilization of shareholder funds
 Cash-flow from operating activities may not capture the actual cash
flow from the entity
 With negative figure for net cash-flow calculation of these ratios are
not possible

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