A liquidity and solvency ratio that relates earnings before interest, taxes, depreciation and amortization (EBITDA) to unavoidable expenditures like interest, debt repayment and preferred dividends. The following formula illustrates that:

TA in the above formula stands for tax-adjusted, i.e., an item is multiplied by (1-tc). For example, a hypothetical company has reported the following: $50,000 in EBITDA, $2,000 in interest, $4,000 in debt repayment and $3,000 in preferred dividends. Assuming that effective tax rates are 25% and 27% for debt repayment and preferred dividends, respectively, then:

Funds flow coverage ratio= 50,000/ [2,000+ (4,000 x 0.75)+ (3,000 x 0.73)] = 6.95

This indicates that the company is able to cover every dollar in expenditures with almost 7 dollars in EBIDTA.