Cash Coverage Ratio | Complete Guide + Calculator

In finance, you often come across different terms that mean the same thing, or almost the same thing. Such is the case with the cash coverage ratio (CCR), which is the same as the cash ratio. It is also similar to cash debt coverage ratio, cash flow to debt ratio, and cash flow coverage ratio. Importantly, each of these terms has its own special nuance. We’ll address all of that in this article, along with formulas and calculations. Of course, we’ll finish with our take on frequently asked questions.

What is Cash Coverage Ratio?

The cash coverage ratio is a measure of a firm’s liquidity. Specifically, it gauges how easily a company comes up with the cash it needs to pay its current liabilities. It is in the same family as the metrics that include the current ratio and the quick ratio. However, it’s more restrictive because it measures only the available cash and cash equivalents, not other assets.

Cash Equivalents

The CCR includes cash equivalents. These are short-term debt instruments that you can quickly convert to cash. They include Treasury bills, money market funds, commercial paper, short-term government bonds and marketable securities. They are all highly liquid and you can sell them for close to face value. Under generally accepted accounting principles (GAAP), you can convert cash equivalents to cash within 90 days. But it usually takes far less time — often minutes — to liquidate these assets.

Significance of CCR

Potential creditors look at your cash ratio to see whether you can pay your debts on time. Purposely, creditors leave out other sources of cash, such as accounts receivable and inventory. Clearly, the reason is that you can’t guarantee that you can convert these short-term assets to cash rapidly enough. Thus, cash is available for creditors without the delay of selling off inventory or collecting receivables.

How to Calculate Cash Coverage Ratio

Cash Coverage Ratio Formula

The cash coverage ratio formula is:

Cash Ratio = (Cash + Cash Equivalents) / Total Current Liabilities

Typically, you may combine cash and equivalents on your balance sheet or list them separately. Invariably, your balance sheet always shows current liabilities separately from long-term liabilities. To be clear, current liabilities are due within one year.

As you can see, the cash coverage ratio formula shows cash and equivalents as a percentage of your current liabilities. Note that there are three possibilities:

  1. Ratio less than 1.0: You don’t have enough cash to pay your current bills. Obviously, this is a flashing red warning sign to creditors.
  2. Ratio equal to 1.0: You would have to exhaust all your cash and equivalents to pay your current bills. Importantly, this is a warning sign that you may be maintaining insufficient cash.
  3. Ratio greater than 1.0: In contrast to the other cases, this one provides comfort to creditors. Naturally, that’s because you have more than enough cash and equivalents to pay all your current bills. Moreover, you can do so without attempting to liquidate your other current assets.

Truthfully, the higher the CCR, the easier it will be for you to secure new debt.

Video: CR or CCR (Formula, Examples) | Calculation

Frankly, it’s easy to calculate the CCR from your balance sheet. Conveniently, you can view this video to step through the calculation.

Example Calculation

In this example, you lease space to a restaurant in a shopping mall. In response to dwindling revenues, it decides to make changes. Specifically, these include remodeling the place and installing newer cooking equipment. Therefore, the restaurant owner visits its local bank seeking a $500,000 loan.

The loan officer reviews the borrower’s balance sheet and finds the following:

  • Cash: $50,000
  • Cash Equivalents: $10,000
  • Accounts Payable: $25,000
  • Current Taxes Payable: $5,000
  • Current Portion of Long-Term Liabilities: $50,000

Therefore, the cash ratio equals:

Cash Ratio = ($50,000 + $10,000) / ($25,000 + $5,000 + $50,000) = 0.75.

The restaurant’s CCR is only 0.75. The owner would have to liquidate other assets to pay all her bills on time. Therefore, the bank refuses to grant the loan. Predictably, within months the restaurant goes bankrupt and closes its doors forever. Now, you must find a new tenant to lease the space, and you’ll probably absorb vacancy costs.

Cash Ratio in Excel

Here is a picture of a typical Excel CCR calculation.

As you can see, there is nothing tricky about using Excel for this calculation.

Similar Ratios

Our Resource Center provides extensive coverage of the financial ratios that you frequently encounter in commercial real estate. For example, see Debt Yield — Everything Investors Need to Know and Cap Rate Simplified (+ Calculator). Of course, we provide coverage on a wide array of topics. For instance, check out our articles on Hard vs Soft Money Loans and Preferred Equity — Everything Investors Need to Know.

The following sections compare similar ratios to the current coverage ratio.

Current Cash Debt Coverage Ratio

This ratio also goes under the name of the cash debt coverage ratio.

This ratio has the formula:

Current Cash Debt Coverage Ratio = (Net Cash from Operations) / Average Current Liabilities

Note that the net cash from operations is for a specific period. Clearly, you must average the current liabilities over that same period. In contrast to the CCR, the current CDCR points to the income statement. Conversely, this is different from the CCR, which depends only on the balance sheet.

A value of 1.0 or higher is good because you can meet all current liabilities with cash from operations.

Cash Flow to Debt Ratio

The cash flow to debt ratio is similar to the current cash debt coverage ratio. Its formula is:

Cash Flow to Debt Ratio = (Net Cash from Operations) / Total Debt

Clearly, the two formulae are close. Specifically, the difference is in the denominator. In this ratio, the denominator includes all debt, not just current liabilities. This ratio is a snapshot of your company’s overall financial well-being. Now, see what happens when you divide the ratio into 1.0. Conveniently, you get the number of years it will take to repay all your debt.

Note that we also label the cash flow to debt ratio as the cash flow coverage ratio.

Cash Coverage Ratio Calculator

You can calculate the CCR by hand, in Excel, or using a calculator. You will find one of several online cash coverage ratio calculators here.

FAQs

What is the difference between cash coverage ratio vs. cash debt coverage ratio vs. cash flow to debt ratio?

The CCR measures cash and equivalents as a percentage of current liabilities. However, the CDCR measures net cash from operations as a percentage of average current liabilities. Finally, the cash flow to debt ratio measures net cash from operations as a percentage of total debt.

What is the main difference between the cash coverage ratio and the times interest earned ratio?

The main difference is scope. Specifically, the times interest earned ratio measures income before interest and taxes as a percentage of interest expense. Conversely, the cash coverage ratio measures cash against all current liabilities, not just interest expense.

What is a good current cash debt coverage ratio?

Creditors are uncomfortable with a cash debt coverage ratio well below 1.0. Because a low figure indicates trouble meeting your debt obligations. On the other hand, creditors like values greater than 1.0. Obviously, this indicates that you have enough cash and equivalents available to pay current bills.

What does the current cash coverage ratio tell us?

In the largest sense, the current CCR tells us whether you are running a profitable business or a stinker. Obviously, if you cannot earn enough income each month to pay your bills, then you have a major problem. Clearly, you’ll have to take action to fix this or throw in the towel.