Crash Course in Accounting and Financial Statement Analysis, Second Edition

Cash Debt Coverage Ratio

Cash from Operating Activities/Average Total Liabilities

Comparing cash from operating activities to total liabilities, the cash debt coverage ratio measures a company’s ability to pay off all of its liabilities with cash from operations.

Drawbacks of Financial Ratio Analysis Although ratio analysis is extremely useful and is a fundamental component of financial analysis, analysts must recognize that it does come with some limitations. Conclusions derived from ratio analysis are often based on the users’intentions and frame of reference; that is,“interpretation depends on the user.” Ratio computation is derived from financial reports, which are issued only at specific intervals (10-K, annually; 10-Q, quarterly), allowing for ratio analysis only at specific points in time rather than on a continuous basis. Ratios do not take into account differences between industries and various accounting methods.