Business, Legal & Accounting Glossary
Cash Coverage Ratio measures the ability of the company’s operating cash flow to cover its obligations, including its liabilities or ongoing concern costs. The Cash Coverage Ratio is an important indicator of the liquidity position of a company. It is often used by the banks to decide whether to make or refinance any loan.
The Cash Coverage Ratio indicates the number of times the financial obligations of a company are covered by its earnings. The larger the operating cash flow coverage for these items, the greater the company’s ability to meet its obligations.
A good ratio also indicates that the company has the cash flow to expand its business, withstand hard times, and not be burdened by debt servicing and the restrictions typically included in credit agreements.
A Cash Coverage Ratio of less than one indicates that there is not enough cash flow to cover loan payments and that bankruptcy is likely within two years if it fails to improve its financial position.
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This glossary post was last updated: 23rd March, 2020 | 10 Views.