A liquidity and solvency ratio that conveys a company’s ability to still pay its debt after dividends payout. In other words, it relates the remaining balance of operating cash flow after cash dividends to current debt:
Current debt refers to debt maturing within one year. This ratio should not fall below one for a company to be able to cover its current debt. For example, a company has reported $30,000 in operating cash flow, $10,000 in cash dividends, and $18,000 in current debt. Then:
Cash debt coverage = (30,000 – 10,000)/ 18,000 = 1.11
This means the company is able to cover its debt maturing in the current year.
