Cash Flow to Debt
Cash from operations divided by total interest-bearing debt. Approximate measure of how many years of operating cash flow would be required to pay off all debt.
When to use: Use as a credit-quality screen. Investment-grade firms typically run >25%; high-yield often falls below 15%. The reciprocal (debt / CFO) tells you "years to pay off all debt with current cash flow" — a key rating-agency input.
Formula
Variables
| Symbol | Name | Description | Unit |
|---|---|---|---|
| CFOToDebt | Cash Flow to Debt | CFO ÷ total debt | % |
| CFO | Cash Flow from Operations | Net cash generated by operating activities (from the cash flow statement) | $ |
| TotalDebt | Total Debt | Short-term + long-term interest-bearing debt | $ |
Real-Life Examples
Example 1: Investment-Grade Industrial
CFO $500M, total debt $1,200M.
Given
Step-by-Step
CFO/Debt of 41.7% — strong, consistent with investment-grade ratings. Equivalent to ~2.4 years of operating cash flow to retire all debt.
Frequently Asked Questions
Rating-agency benchmarks: AAA/AA: >60%. A: 40-60%. BBB: 25-40%. BB: 15-25%. B: <15%. Below 15% is high-yield territory; below 5% signals distress.
This formula uses CFO (before CapEx) — the standard for credit analysis since CapEx is discretionary in the short run. Using FCF gives a stricter measure but can misclassify growth firms with high-but-discretionary CapEx as risky.