What this calculator does
Cash flow coverage ratios test liquidity against what the business actually generates rather than against what sits on the balance sheet. The operating cash flow ratio compares annual cash generation with current liabilities, and cash flow to debt does the same against total borrowings.
They are stricter than the current ratio, which counts inventory and receivables as though they were cash. A business generating $250,000 against $300,000 of current liabilities has a ratio of 0.83, meaning a full year of operating cash would not quite clear its near-term obligations.
The formula
Operating cash flow is divided by current liabilities for the first ratio and by total debt for the second. The second is normally expressed as a percentage, showing what share of debt annual cash flow could repay.
| Term | Meaning |
|---|---|
| Operating cash flow ratio | Cash from operations divided by current liabilities. |
| Cash flow to debt ratio | Cash from operations as a percentage of total debt, indicating years to repay. |
| Operating cash flow | Cash generated by the business, from the cash flow statement. |
The inputs explained
| Field | What to enter |
|---|---|
| Operating cash flow ($) | Operating cash flow for the year, from the cash flow statement. |
| Current liabilities ($) | Total current liabilities. |
| Total debt ($) | Total interest-bearing debt. |
When to use it
Assessing real liquidity
Cash generation is a more demanding test than asset balances, which may not convert quickly.
Estimating years to repay debt
A cash flow to debt ratio of 25 per cent implies roughly four years of cash flow to clear the borrowings.
Supporting a lending application
Lenders look at cash coverage alongside the balance sheet ratios.
Worked examples
Every figure in the tables below is produced by this page’s own calculator at build time, so the numbers and the tool always agree. Select any row to load that scenario.
How much cash flow does it take to cover obligations?
The same obligations against three levels of cash generation.
| Operating cash flow | Operating cash flow ratio | Cash flow to debt ratio |
|---|---|---|
| $150k | 0.50× | 16.7% |
| $250k | 0.83× | 27.8% |
| $400k | 1.33× | 44.4% |
Questions
How does this differ from the current ratio?
The current ratio compares asset balances against liabilities; this compares cash actually generated. A company can have a healthy current ratio built on slow-moving inventory while generating very little cash, and this ratio exposes that.
What is a good operating cash flow ratio?
Above 1.00 means a year of operating cash would clear all current liabilities, which is comfortable. Many sound businesses sit below that, since current liabilities include payables that roll over continuously rather than falling due at once.
How do I read cash flow to debt?
As the inverse of years to repay. A ratio of 25 per cent implies roughly four years of undiverted operating cash flow to clear the debt, which is a useful way to gauge whether borrowings are proportionate.
Should free cash flow be used instead?
It is a stricter test, since it deducts capital expenditure that must be funded regardless. Operating cash flow is the conventional numerator here, but running both is more informative.
For balance sheet liquidity, see the liquidity ratios calculator. For cash after capital spending, see the free cash flow calculator.