CFA Level I · CFA Level I Exam · Analyzing Statements of Cash Flows II
An analyst wants a ratio that shows how many times a company's operating cash flow covers its total debt obligations in the year. Which ratio is most appropriate?
Cash flow to total debt is the most appropriate ratio. It divides cash flow from operations by total debt, showing how well operating cash flow covers the company's debt. The other two ratios measure cash margin on sales and cash return on assets, not debt coverage.
- ACash flow to revenue
- BCash flow to total debtCorrect
- CCash return on assets
Explanation
Cash flow to total debt divides cash flow from operations by total debt, so it measures coverage of debt by operating cash flow. Cash flow to revenue measures cash generated per unit of sales, and cash return on assets measures cash generated relative to assets, so neither measures debt coverage.
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