1. What is the Cash Coverage Ratio?

The Cash Coverage Ratio measures a company's ability to cover its interest expenses with its cash flow from operations. It is calculated by dividing EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) by the interest expense.

2. How Does the Calculator Work?

The calculator uses the Cash Coverage Ratio formula:

Where:

• \( \text{EBITDA} \) — Earnings Before Interest, Taxes, Depreciation, and Amortization (currency units)
• \( \text{Interest Expense} \) — Total interest expense (currency units)

Explanation: The ratio indicates how many times a company can cover its interest payments with its operating cash flow.

3. Importance of Cash Coverage Ratio

Details: A higher Cash Coverage Ratio indicates better financial health and ability to meet interest obligations. Lenders and investors use this ratio to assess a company's creditworthiness and financial stability.

4. Using the Calculator

Tips: Enter EBITDA and Interest Expense in the same currency units. Both values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What is a good Cash Coverage Ratio?
A: Generally, a ratio above 1.5 is considered acceptable, while a ratio above 2.0 is considered good. Higher ratios indicate better ability to cover interest expenses.

Q2: How does Cash Coverage Ratio differ from Interest Coverage Ratio?
A: Cash Coverage Ratio uses EBITDA (which includes non-cash expenses), while Interest Coverage Ratio typically uses EBIT (Earnings Before Interest and Taxes).

Q3: Why use EBITDA instead of net income?
A: EBITDA provides a better measure of operating cash flow by excluding non-operating expenses like taxes, interest, and non-cash charges like depreciation and amortization.

Q4: What are the limitations of Cash Coverage Ratio?
A: The ratio doesn't account for principal repayments on debt, capital expenditures, or changes in working capital requirements.

Q5: How often should this ratio be calculated?
A: It should be calculated regularly (quarterly or annually) to monitor a company's ability to service its debt obligations over time.