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Cash Coverage Ratio
The cash coverage ratio is a solvency ratio that measures a company's ability to pay its interest obligations using cash from operating activities.
What it Measures
How many times the company can pay its interest payments using operating cash.
Interest Paid
- The amount of cash paid in interest.
- Usually found at the bottom of a cash flow statement
- If not given, use formula to find it:
Income Tax Paid
- The amount of cash paid in income taxes.
- Usually found at the bottom of a cash flow statement
- If not given, use formula to find it:
Interpreting the ratio
- The higher the ratio is, the better.
- Ratio > 1: Means the company generated enough cash from its operations to pay for its interest.
- This is a sign of financial strength
- Ratio < 1: Means the company used non-operating cash to pay for its interest obligations.
- This is not a good sign
- Could mean trouble in the future
- Could mean company will have solvency issues in the future
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Example: Cash Coverage Ratio
Compute the cash coverage ratio for Apple, Inc. for the ended September 28, 2019.
Practice: Cash Coverage Ratio
Use the following financial information to compute the cash coverage ratio for the year 2020 and interpret your results.
Cash coverage ratio
Do not round your work, round final answer to 2 decimal places.