How is the debt to cash flow ratio calculated?



Q35. Debt to cash flow ratio
How is the debt to cash flow ratio calculated?

A35.
Debt to cash flow ratio = (A) / (B)
Where,
(A) = Total liabilities
(B) = Cash flows from operating activities

[Entity 35-a]
Total liabilities = $672,000
Cash flows from operating activities = $560,000
Debt to cash flow ratio
= $672,000 / $560,000 = 1.2

[Entity 35-b]
Total liabilities = $882,000
Cash flows from operating activities = $630,000
Debt to cash flow ratio
= $882,000 / $630,000 = 1.4

[Note]
Debt to cash flow ratio is lower for Entity 35-a than for Entity 35-b.
Thus Entity 35-a is better prepared with cash flows from operating activities to pay off total liabilities than is Entity 35-b.