Cash debt coverage, in it's most simple terms, is the amount of debt that can be covered by the amount of cash currently on hand. Cash debt coverage ratio is an important tool when examining a financial statement for businesses since it can tell you how long it will take a business to pay off its current debts.

## Cash Debt Coverage Ratio Formula

To determine the ratio of cash debt coverage this simple formula can be used: "(cash flow from operations - dividends) / total debt." Make sure to use proper mathematical procedure (completing the values inside the parentheses then dividing by total debt).

## Debt Cash Ratio Output Explained

Let's use simple number--if a company had a debt cash ratio of $10 and paid out dividends of $5 with debt of $5 they would have a 1:1 ratio. More specifically, (10-5)/5 which would equal 5/5, or an even 1/1 ratio. That company would be able to pay off its full debt in one year. However a company with $10 cash, $8 in dividends and $5 debt would look like this: (10-8)/5 or 2/5 for a 2.5 ratio, meaning the company would pay off their current debts in 2.5 years.

## Determining a High Cash Debt Coverage Ratio

Cash Debt Coverage of 1:1 would mean a company could cover 100 percent of its debt in a one year period--a very acceptable figure. According to Investopedia, a debt ratio that can cover at least 80 percent of a company's debt would be considered acceptable. However, the acceptable level of cash to debt relies on various outside factors and the risk an investor or business is willing to assume.

## A Measure Of Liquidity

Cash debt coverage is not measured on a set time period, such as annually. Instead, the formula is used to measure the changing liabilities of an organization whenever financial statements are provided. The formula takes any net cash from operating activities at any given time and divides them by average current liabilities, allowing investors to determine if the company is operating at levels it can sustain in terms of current debt. By determining the cash debt ratio the point of liquidity for an organization can be more easily determined.

## Cash Debt Ratio Analysis Warnings

Standard cash debt coverage ratios use a very liberal formula to determine liquidity, however other factors such as short-term borrowing, long-term debt positioning, stock redeemed for cash by employees and holders of the company's preferred stock (stock that is guaranteed payment before normal stock options), the cost of operating leases (buildings and equipment leasing) should also be taken into consideration.