Cash flow from operations to debt (CFO to debt) is a financial ratio that measures a company's ability to generate cash from its operations to cover its debt obligations. It is calculated by dividing a company's cash flow from operations by its total debt.
Cash flow from operations refers to the amount of cash a company generates from its normal business operations, such as sales revenue and expenses, before taking into account any financing or investment activities. Total debt, on the other hand, includes all of a company's outstanding debt obligations, including both short-term and long-term debt.
The resulting ratio shows how many times a company's cash flow from operations can cover its total debt. A higher ratio indicates that the company has more cash available to manage its debt obligations and invest in growth opportunities, while a lower ratio suggests that the company may struggle to generate enough cash to meet its debt obligations.
The ideal cash flow from operations to debt ratio may vary depending on the industry and the company's specific circumstances. However, in general, a ratio of 1 or higher is considered healthy, indicating that the company is generating enough cash to service its debt.
Company has cash flow from operations of $10 million and total debt of $5 million. The cash flow from operations to debt ratio would be calculated as follows:
Cash Flow from Operations to Debt = Cash Flow from Operations / Total Debt
Cash Flow from Operations to Debt = $10 million / $5 million
Cash Flow from Operations to Debt = 2
In this example, the company's cash flow from operations can cover its total debt obligations twice over, which suggests that the company has a healthy cash flow position and is able to manage its debt obligations effectively.