Cash and liabilities are two important components of a company’s finances. Cash is the company’s most liquid asset. Existence is important for resources that are available for exchange on demand by companies. Debt, on the other hand, is a third-party funding source that must be repaid along with the money.

Understanding the Cash Flow to Debt Ratio

cash flow to debt ratio is the ratio between the company’s total cash flow and the company’s total liabilities. cash flow to debt ratio It’s important to note when assessing how quickly a company’s cash can be used to pay off debt.

Cash flow is the cash a company receives from operating activities. while the total liabilities result from the increase of short-term and long-term debt of the company.

Cash is the most liquid asset of any company. The higher the ratio between cash and debt. This means that companies can pay off their debts faster. This does not rule out the possibility of banks or third parties collecting company debt faster than they should.

Cash Flow to Debt Formula

The cash flow to debt ratio formula is CFDR = (Cash flow from operating activities) / (Total liabilities).

This ratio is generally expressed as a percentage. However, this matrix can be specified in years by dividing the number 1 by the result.

For example, the value of Company A’s cash flow and debt ratio is 10%, which means that Company A’s cash to debt ratio is 10%. When will the debt be discharged? Payment will be made within:

Cash flow to debt ratio (year): 1/10% = 10 years, which means that debt is paid off for 10 years only.

However, it doesn’t make sense if all the company’s cash is used to pay off debt. Therefore, this metric is generally only used to assess the financial condition of a company and is accompanied by other metrics.

How to Calculate Cash Flow to Debt Ratio

In addition to using the cash flow to debt ratio Some analysts also use other variables. to measure financial status as well. Other variables include: EBITDA (profit before interest depreciation and amortization), liquidity finance (FCF) and long-term debt (long-term debt).

In this case, EBITDA is not recommended because the EBITDA component is also included in the purchase of new raw materials or goods. Which of course takes more time to convert into cash.

FCF is widely used because the cash in this variant is reduced by the cash used for capital expenditures (capital expenditureHowever, the use of FCF also means that the value of this indicator is likely to be less than using cash flows from operating activities alone.

For long-term debt, the calculation results are quite large but biased. This is because short-term debt requires more cash than long-term debt. Therefore, this matrix should be calculated using long-term debt as the denominator.

Example of Calculating Cash Flow to Debt Ratio

Here is an example of calculating financial indicators for PT Temas Tbk:

information 2021 2020
cash from operating activities 708,628 564,331
debt consolidation 2,509,761 2,626,095
Cash flow to debt ratio 28.23% 21.49%
in the year 3.541718645 4,653465785
Source: PT Temas Tbk Financial Report 2021

The data shows that it is quite clear that the comparison between operating cash flow and debt at PT Temas Tbk has improved despite the increase in debt. The data shows that the company’s debt will be paid back in cash within 3.5 years (2021) and 4.6 years (2020).

The above financial information is presented in the Company’s financial statements. All debt information is on the balance sheet. Whereas cash flow information from operating activities can be obtained from the cash flow statement.

Using the Cash Flow to Debt Ratio

The cash flow to debt ratio is included in the coverage ratio. This is the ratio used to measure the company’s ability to pay off debt. The higher the coverage ratio The better and better the company’s finances will be.

The financial health of a company can have many implications. This factor can determine whether a company deserves additional funding from banks and investors. It also indirectly highlights a company’s ability to pay dividends and pay bonds and coupons.

However, the coverage ratio is not the only form of this indicator. but also other matrices such as current ratio, Debt to Equity Ratio (der) Debt to Asset Ratio (DAR), etc. Therefore, the cash flow to debt ratio is generally used with other financial indicators. and analyzed as a time series (occasionally) and across segments (using companies operating in the same branch as a comparison).

What is a good cash flow value to debt ratio?

In general, a cash flow to debt ratio greater than 1 is considered a good ratio.

This means that the company’s cash is equal to or greater than its total money. Conversely, if the cash flow to debt ratio is less than 1, the company’s financial condition is questionable.

However, there are problems with this rigorous benchmark, including:

  1. Not all cash is used to pay off company debts. This means that it is likely that the value of the cash that will be used to settle the debt will be less than the value in the equation above.
  2. In general, all cash The total debt (including from non-operating sectors) is less than the total debt. Because all debts include long-term debt.
  3. Companies in each industry have different operating and financial methods. It may be that a company is focused on financing. while the other company doesn’t care. Therefore, it is important to analyze this indicator over several years and companies at once.

The financial health of a company is an important factor that investors must consider. especially long-term investors There are many indicators that can be used to analyze this factor. One of them is the ratio between operating cash flow and total liabilities of the aforementioned companies.



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