The Current Cash Debt Coverage Ratio Shows The Ability To Generate Net Income. O The Ability To Finance Assets With Debt. O The Ability To Pay Current Liabilities With Current Assets. The Ability To Pay Current Liabilities With Cash From Operations.
The Correct Answer and Explanation is:
Correct Answer:
✔️ The ability to pay current liabilities with cash from operations.
The Current Cash Debt Coverage Ratio is a financial metric used to assess a company’s short-term liquidity, specifically how well it can cover its current liabilities using the cash generated from operating activities. This ratio provides a more accurate picture of a company’s ability to pay its debts than traditional measures like the current ratio or quick ratio, as it is based on actual cash flow rather than accounting profits or current asset values.
The formula for the Current Cash Debt Coverage Ratio is:
$$
\text{Current Cash Debt Coverage Ratio} = \frac{\text{Net Cash Provided by Operating Activities}}{\text{Average Current Liabilities}}
$$
This ratio is found on the statement of cash flows, typically in the cash flows from operating activities section. It shows how many times the company can cover its current liabilities with the cash it generates from its core business operations over a specific period, usually a year.
For example, a ratio of 1.0 means the company generates enough cash from operations to pay off its current liabilities exactly once during the year. A ratio higher than 1.0 indicates strong liquidity, while a ratio below 1.0 could signal potential liquidity issues.
This measure is especially important to investors and creditors, as it reflects the company’s ability to generate real cash, which is necessary to pay suppliers, meet payroll, and cover interest and principal payments on short-term debt. Unlike net income, which can be influenced by non-cash items like depreciation or accruals, cash from operations reflects actual cash inflows and outflows, making it a more reliable indicator of financial health.
In summary, the Current Cash Debt Coverage Ratio best measures the ability to pay current liabilities with cash from operations, not net income or asset financing.
