Cash Coverage Ratio
Cash from operations plus interest plus taxes, divided by interest expense. Cash-based interest coverage — measures the actual cash available to service interest, before interest itself was paid.
When to use: Use as a more conservative interest-coverage measure than EBIT-based. EBIT can flatter firms with poor working-capital management; cash-based coverage uses real cash and is harder to game. Lenders increasingly favor this metric for credit decisions.
Formula
Variables
| Symbol | Name | Description | Unit |
|---|---|---|---|
| CashCov | Cash Coverage Ratio | (CFO + interest + taxes) ÷ interest | integer |
| CFO | Cash Flow from Operations | Net cash generated by operating activities (from the cash flow statement) | $ |
| Interest | Interest Expense | Annual interest expense | $ |
| TaxExpense | Income Tax Expense | Income tax expense for the period | $ |
Real-Life Examples
Example 1: Levered Industrial
CFO $400M, interest $50M, taxes $80M.
Given
Step-by-Step
10.6× cash coverage — strong cushion. Compare to EBIT-based interest coverage; if cash coverage is meaningfully above, the firm's actual cash generation is comfortably ahead of accounting EBIT.
Frequently Asked Questions
Both are subtracted on the way to CFO (or, more precisely, CFO is calculated after them). Adding them back gives the cash available to service interest before that interest was paid — the relevant denominator-numerator pairing for a true coverage measure.
EBIT can show coverage that doesn't convert to cash (think: revenue recognized but not collected). Cash Coverage uses CFO, which has already absorbed working-capital effects, so it's more conservative and harder to manipulate.