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Estimates how quickly a company can pay off all its debt with only its cash flow.[sc:kit02 ]
Cash Flow to Total Debt Formula
Explanation of Cash Flow to Total Debt
The Cash Flow to Total Debt ratio measures the length of time it will take the company to pay its total debt using only its cash flow. This assumes all the cash flow would be used to pay off both Short-Term Debt and Long-Term Debt, which is not realistically possible for a company to devote all of its cash flow in this way. However, this ratio is used as a “what-if” scenario as a basis to compare company results and performance to other companies.
Importance of Cash Flow to Total Debt
A high, or increasing Cash Flow to Total Debt ratio is usually a positive sign, showing the company is in a less risky financial position and better able to pay its debt load. A company with a decreasing ratio results in a riskier financial position, as declining cash flow and/or a rising debt load reveals a company that is less able to manage its debt.