Cash Coverage Ratio Calculator
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Historical Background
The cash coverage ratio is a financial metric that gauges a company’s ability to meet its interest obligations with available cash flow. It indicates how many times the company's operating cash flow can cover its interest expenses. This ratio is crucial for evaluating financial health, especially when a company relies heavily on debt financing.
Formula
The formula to calculate the cash coverage ratio is:
\[ \text{CCR} = \frac{\text{EBIT}  \text{NCE}}{\text{IE}} \]
where:
 CCR: Cash Coverage Ratio
 EBIT: Earnings Before Interest & Tax
 NCE: NonCash Expenses
 IE: Interest Expenses
Example Calculation
Assume a company has an EBIT of $120,000, noncash expenses of $20,000, and interest expenses of $30,000. The cash coverage ratio would be calculated as:
\[ \text{CCR} = \frac{120,000  20,000}{30,000} = \frac{100,000}{30,000} \approx 3.3333 \]
This result means that the company can cover its interest expenses about 3.33 times with its cash flow, indicating a good ability to service its debt.
Importance and Usage Scenarios
This ratio is significant because it helps assess a company's financial health and risk level. A high ratio implies better ability to meet debt obligations, reducing the likelihood of default. Conversely, a low ratio signals potential financial distress. Investors, creditors, and analysts use the cash coverage ratio to make informed decisions about a company's creditworthiness and investment attractiveness.
Common FAQs

What is a cash coverage ratio?
 The cash coverage ratio measures the available cash to pay interest expenses. The higher the ratio, the larger the amount of cash available for each unit of interest expense.

What is a good cash coverage ratio?
 A ratio above 1 is considered good, indicating that a company can cover its interest expenses with cash flow. Higher ratios reflect better financial stability.

Why is EBIT used in this calculation?
 EBIT represents a company's profit from its core operations, providing an accurate measure of operational profitability without the influence of financing and taxation factors.