DEFINITION OF 'Cash flow coverage ratio'

This ratio indicates the company ability to pay debt and interest in time. It measures company ability to cover company liabilities and its ongoing concern cost.

Formula =

Debt coverage ratio = Operating cash flow/Total Debt

Short term debt coverage ratio = Operating cash flow/ Short term Debt

Dividend coverage = Operating cash flow/ Cash Dividend

Capital Expenditure Coverage = Operating cash flow / Capital Expenditure

Operating cash flow supply the necessary cash to keep the business funded and it is simply the cash generated from operations.

Operating cash flow is net cash provided or used by the operating activities and reflected under company cash flow statement.

Cash flow statement has three sections

1. Cash flow from operations
2. Cash flow from investing
3. Cash flow from financing

In the operating section of cash flow, Net income is adjusted for non cash and non operating charges and adjusted for change in working capital or increase and decrease in current assets and current liability. This results in operating cash flow figure.