cash flow coverage ratios

Question 1

debt coverage formula

Answer 1

CFO / total debt

Question 2

interest coverage formula

Answer 2

(CFO + interest paid + taxes paid) / interest paid

Question 3

reinvestment formula

Answer 3

CFO / cash paid for LT assets

Question 4

debt payment

Answer 4

CFO / dividends paid

Question 5

investing and financing

Answer 5

CFO / cash outflows for investing and financing activities

Question 6

debt coverage definition

Answer 6

measures financial risk and financial leverage

Question 7

interest coverage definition

Answer 7

ability to meet interest obligations

Question 8

reinvestment definition

Answer 8

ability to acquire assets with operating cash flows

Question 9

debt payment definition

Answer 9

ability to pay debts with operating cash flows

Question 10

dividend payments definition

Answer 10

measures ability to pay dividends with operating cash flows

Question 11

investing and financing definition

Answer 11

ability to acquire assets, pay debts, and make distributions to owners

Question 12

what do ratios based on cash flow tell us

Answer 12

they provide information that help analyst b etter understand the company’s past perfromance and develop expectations about the company’s future prospects

Question 13

what to coverage ratios tell us

Answer 13

there ratios measure the extent to which operating cash flow “covered” various of the company’s expenditures and commitments

Question 14

debt coverage interpretation

Answer 14

• a negative debt coverage indicates that a company’s cash flow from operations was insufficient to cover its debt obligations in both years- raises concern about their ability to service debt
• lenders use DSCR to determine whether a business has enough net operating income to pay back loans
• a high DCR indicates healthy cash flow obligations and and a low debt risk profile
• if its above 2 it means that the company is able to cover at least double its debt obligation amount

Question 15

interest coverage ratio interpretation

Answer 15

• a higher ICR means that a company is more likely to be able to pay its debt
• a ratio less than 1 indicates that the company is struggling to generate enough cash to repay its interest obligations

Question 16

reinvestment ratio interpretation

Answer 16

• a high ratio indicates tat the company is reinvesting a larger portion of its cash flow suggesting that it is focussed on growth and expansion
• a low ratio suggests that the company is distributing more of its cash to shareholders in the form of dividends, indicating that it may be more focused on providing returns to investors

Question 17

debt payment interpretation

Answer 17

• if the ratio is over 1, a company has more debt than assets
• if it is below 1, the company has more assets than debt
• ratios of 60% (0.6) or more are considered high
• ratios of 40% (0.4) are considered low

Question 18

dividend payment ratio interpretation

Answer 18

• a high dividend payout ratio means that the company is reinvesting less money back into the business, while paying out relatively more of its earnings in the form of dividends.
• low= the company is reinvesting more money back into expanding the business