Technicals Stability Returns



Understanding Cash Flow from Operations to Debt Ratio


Cash Flow from Operation (CFO) to Debt Ratio indicates how much time it will take for the company to meet its debt obligations by its cash flow from operations, or we can say that it is a measure of the operating cash generated by the company relative to its debts. It shows the company's solvency position and overall financial health. CFO to debt ratio is calculated by dividing cash flow from operations to debt by total debts.

The formula to derive Cash Flow From Operation to Debt Ratio

Cash Flow from Operations to Debt


Cash flow from operations - It is the amount of cash the company generates from its continuous operating activities. Some examples of operating activities are manufacturing of goods, selling of goods, and services, etc. And it is found in the company's cash flow statement.

Total Debt - It is a sum of the company's long-term debts and short-term debts. And it is found in the company's liabilities section of the Balance Sheet.

Example of CFO to Debt Ratio: For the financial year, Asian Paint Limited reported cash flow from operation as Rs.3683.35 Cr. and total debt as Rs. 340.23 Cr.
The value as per the formula (Cash Flow from Operation / Total Debt) is calculated as (3683.35 / 340.23) = 10.83.


Key Highlights
Cash Flow from Operation (CFO) to Debt Ratio indicates the company's ability to meet its debt obligations by its operating cash flow.

CFO to debt ratio is calculated as cash flow from operations divided by total debts.

Compare companies that operate in the same industry as CFO to debt ratio differs from one industry to another.

Cash flow operations refer to the amount a company generates from its continuous operating activities.


While looking at the Cash Flow from Operation to Debt Ratio, the following points should also take into consideration:
A high cash flow from operation to debt ratio below one is considered good. It indicates the company's earnings from its operating activities are more than its debts, and a company can cover its debt obligations by operating cash.

A low CFO To debt ratio indicates insufficient operating cash flow or low operating cash flow than debts, and the company may not be able to meet its debt obligations by its cash flow.

Many investors look at the CFO to debt ratio because it takes cash flow from the operation into accounts, and the company cannot manipulate it easily.

Lenders refer to this ratio before lending money to the company to analyze whether it can pay back or not. And generally, prefers a company with a high CFO to debt ratio as it indicates that the company generates steady operating cash flow. A well-established company of a mature industry is more likely to have a steady cash flow from operations than new startups.


How to use Cash Flow from Operation to Debt Ratio effectively
A company with a CFO to debt ratio above one is usually considered good. It indicates the company is generating sufficient cash from its operating activities and can cover its debt obligations by operating cash flow.

While analyzing the company, check the past performance over the year for better understanding. Analyzing the company's historical data will give a better understanding of the company's past performance.

Compare companies that operate in the same industry as CFO to debt ratio differs from one industry to another.

We cannot analyze the performance of a company with a single ratio, so CFO to Debt Ratio, we should look at other financial metrics such as Debt to Equity Ratio, Debt to EBITDA Ratio, Interest Coverage Ratio, etc.,


Range Indicator of CFO to Debt Ratio

Range Indicator Comments
Above 1.5 Strong Bullish Excessive CFO to Cover Debts
1.2 to 1.5 Bullish Surplus CFO to Cover Debts
1 to 1.2 Mild Bullish Sufficient CFO to Cover Debts
0.7 to 1 Neutral Stable CFO to Cover Debts
0.5 to 0.7 Mild Bearish Shortfall in CFO to cover Debts
0.3 to 0.5 Bearish Insufficient CFO to cover Debts
Below 0.3 Strong Bearish Deficiency in CFO to Cover Debts