How to Calculate Debt Coverage Ratio
Debt coverage ratio shows a company's ability to pay its debts. The debt coverage ratio compares the cash flow the company has to the total amount of debt the company must still repay. A debt coverage ratio below 1 means the company cannot currently pay off all its debts. A debt coverage ratio close to zero could be a warning that the company is in very poor financial condition. Any debt coverage ratio above 1 shows that the company could pay back all of its debts.
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1.
Determine cash flows from operations, dividends paid and the total debt the company owes. Cash flows from operations are the total cash from business activities. This amount will be under the operating section on a company's cash flow statement. Dividends will be on a company's income statement. Total debt will be on a company's balance sheet under liabilities. For example, a company has $400,000 of cash flow from operations and paid $50,000 of dividends this year. The total debt is $500,000.
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2.
Subtract dividends from the cash flows from operations. In the example, $400,000 minus $50,000 equals $350,000.
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3.
Divide the number calculated in Step 2 by the total debt. In the example, $350,000 divided by $500,000 equals 0.7 or a 70 percent debt coverage ratio.
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Writer Bio
Carter McBride started writing in 2007 with CMBA's IP section. He has written for Bureau of National Affairs, Inc and various websites. He received a CALI Award for The Actual Impact of MasterCard's Initial Public Offering in 2008. McBride is an attorney with a Juris Doctor from Case Western Reserve University and a Master of Science in accounting from the University of Connecticut.