Current Liability Coverage Ratio Explained

The current liability coverage ratio is a crucial metric for businesses to understand their financial health. It's calculated by dividing current liabilities by current assets.

This ratio helps identify if a company can pay its short-term debts on time. A high ratio indicates that the company may struggle to meet its obligations.

For example, if a company has $100,000 in current liabilities and $150,000 in current assets, its current liability coverage ratio is 0.67 or 67%. This means the company's current assets can cover its current liabilities by 33%.

The current liability coverage ratio is a measure of a company's ability to pay off its debts with the operating cash inflow it receives during an accounting period. It's a key indicator of a company's liquidity.

This ratio is also known as the interest coverage ratio or the times interest earned (TIE) ratio. It's a way to assess a company's financial health and its ability to meet its debt obligations.

The current liability coverage ratio is calculated by dividing a company's operating cash flow by its current liabilities. This ratio shows how well a company can cover its current debts with its available cash.

By using the cash coverage ratio, creditors can get a clear picture of a company's ability to pay off debt promptly. This ratio is more accurate than other formulas that take into account assets or inventories, which may not always provide an accurate projection of payment ability.

The current cash debt coverage ratio is calculated by dividing the net cash flow from operating activities by the company's average liabilities. This ratio gives you a snapshot of a company's ability to cover its current liabilities with its cash flow from operations.

To calculate the ratio, you'll need to extract the net cash flow from operating activities from the cash flow statement and divide it by the company's average liabilities. This is a crucial step in determining a company's liquidity and solvency.

Here's a simple formula to keep in mind: Current Cash Debt Coverage Ratio = Net Cash Flow from Operating Activities / Average Liabilities.

This ratio is a key indicator of a company's ability to meet its short-term obligations, and it's essential to understand how it's calculated to make informed decisions about investing in a company.

A cash coverage ratio of one indicates that the company has just enough cash to meet its present liabilities. If the ratio is greater than one, the company has sufficient finances to pay off its present obligations. A ratio of less than one indicates that it does not have enough cash or cash equivalents to pay down current debt.

A high current cash debt coverage ratio indicates that a company can cover its debt with its current operating cash flow generation. This is because a high amount of net cash flow from operating activities results in a higher cash coverage debt ratio.

A cash debt coverage ratio of 1 or higher implies that the business is liquid enough to clear its debts on time. This is because a value of 1 or higher means that the business can cover its current liabilities with its current assets.

However, a low net cash flow from operating activities resulting in a cash debt coverage ratio of less than 1 indicates low liquidity. This means that the business cannot pay off its current debts since it cannot generate enough cash flow.

To determine if a company's current ratio is healthy, you can use the following guidelines:

A company with a current ratio of 1.5, for example, has $1.50 of current assets for every $1 of current liabilities. This means that the company has a good chance of paying off its debts on time.

However, a current ratio of 1.5 may also indicate that the company is not using its current assets efficiently. This is because a high ratio may indicate that the company is not securing financing well or properly managing its working capital.

The current liability coverage ratio is a valuable tool for investors and analysts. It helps understand a company's ability to cover its short-term debt.

A high current liability coverage ratio indicates that a company is likely to make all its future interest payments and meet all its financial obligations. This is because the coverage ratio measures a company's ability to service its debt and meet its financial obligations.

However, it's essential to consider the limitations of the current liability coverage ratio. The ratio can't easily be used for comparisons between companies across different industries, as industries will have different expected or average current ratios.

The current ratio compares all of a company's current assets to its current liabilities, which helps investors understand a company's ability to cover its short-term debt. This information can be used for comparisons with competitors and peers.

Other limitations of the current liability coverage ratio include the overgeneralization of specific asset and liability balances, as well as the lack of trending information. This means that the ratio may not provide a complete picture of a company's financial health.

Cedar Valley Brewing is a great example of how different coverage ratios can give us different insights into a company's financial health. The company's interest coverage ratio of 6.0 looks extremely favorable, but its debt-service coverage ratio of 1.05 leaves little room for error.

Apple Inc.'s current ratio is a good example of how it can change over time. In 2021, Apple's current ratio was higher than 1, indicating that it had more current assets than current liabilities. However, by the end of 2022, Apple's current ratio had decreased to less than 1, indicating that it did not have enough current assets to pay all of its short-term bills.

Bharti Airtel's decreasing coverage ratios are a warning sign for the company. As its debt has increased over the years, its EBIT has gone down, and its coverage ratios have decreased. This trend is likely to continue if the company doesn't take action to reduce its debt.

The cash coverage ratio is a useful metric for companies that want to explore financing alternatives. Cedar Valley Brewing's cash coverage ratio of 1.11 indicates that it has enough cash to pay off all its debt obligations.

Apple's current ratio increased to 1.07 by the end of 2023, indicating that the company had regained its financial stability. This is a good example of how a company's financial situation can change over time.

A company's current liability coverage ratio is a critical metric that indicates its ability to pay off its short-term debts. Apple's current liability coverage ratio is a good example of how this metric can change over time and provide insights into a company's financial health.