Cash Flow to Debt Service Ratio

Cash flow to debt service ratio is the improvement in interest coverage ratio. In interest coverage ratio, we create relationship between net profit and total interest payment but we all know that interest payment will always in cash form. So, it will be better if we create relationship between cash flow  from operation instead of net profit and total interest payment. Following is the formula of cash flow to debt service ratio.

In this formula, we are seeing that there is relationship between cash inflow from operation and total interest payment. More high will our cash flow before interest, depreciation and taxes, more we can easily pay our interest without any problem. 

What is sinking fund Appropriation on Debt? 

Sinking fund is just like a reserve fund which is used for repayment of loan. So, this fund is also created from our profit for repayment of loan. This fund will be specific rate on our taken debt. So, we will add this total interest payment when we calculate cash flow to debt service ratio. 


Calculate cash to debt service ratio :

Net profit after tax = 22500

Fixed interest charges = 2000

Depreciation charged = 3000

Tax rate = 50% 

Sinking fund appropriation = 7.5% of outstanding debentures 

10% debentures = 20000

Debt cash flow coverage ratio or cash flow to debt service ratio =

CF/ 1 + SFD / 1 - T 

= 22500 + 22500 ( tax ) + 2000 ( interest ) + 3000 ( Depreciation ) / 2000 + 1500 / 1- 50% 

= 50000 / 2000 + 1500 / 0.5

= 50000 /5000 = 10 times

It means we have 10 times cash from our profit which is available for paying interest. In other words, we have cash profit for paying interest on the debt of 200,000.

Importance of Cash Flow to Debt Service Ratio

To calculate this ratio is very important for creditor because our creditor will think 100 times before giving us loan. If he see,  we have 10 times cash profit for paying his interest on loan, he will ready to give us more loan. If this cash flow to debt service ratio will be 20 times, other creditors will also be ready to give us loan. If our cash flow to debt service is just 1 or 2 times, our creditors can say us good bye, when we will ask for loan. 






access account accountant Accounting accounting definitions accounting ebook Accounting education accounting procedure accounting process outsourcing Accounting Software advance advertising africa Amalgamation amendments announcements Annuity assets audit auditing Australia B.Com. balance sheet bank Bank reconciliation banking basic accounting BBA benefits best bill black money blog bloggers book keeping bookkeeping Branch Accounting - full tutorial budget Budget variance business businessman CA calculator canada capital capital budgeting career cash cash book cash flow statement Chiense children china class coaching coins college commerce commerce students company computer computer accounting conference Contact vinod kumar Control Your Spending corporate accounting cost cost accounting cost center cost centre CPA credit credit card cs currency data Debit and credit debit cards debt debtor degree depletion depreciation Diwali Messages documents dollar domain Downloads Dubai e-accounting earning education Education Loans email employee EPF ERP euromoney examination excel excise duty expenses facebook factor of loan fans feature fifo FII fiji finacle finance Finance Journal Entries Financial financial accounting fire insurance flickr flow forensic forex formula france fraud free fun function fund GAAP GDP gdr germany gold goodwill goodwill accounting google google apps Google Adsense google apps google base google buzz google calendar Google docs google finance google fusion tables google talk govt. GST guide health Hindi Hindi Language history holding company How to treat FBT in Tally 9 HRA ICAI ICAWI ICICI Bank IFRS income income statement Income Tax India indian railway Indonesia inflation inflation accounting infographics information inspiration insurance insurance accounting Intangible interest international Internet Introduction of Tally 9 inventory investment investment in Shares invoice IT Japan Job costing journal entries Journal Entries eBook Help Kalculate keyboard kindle kuwait laptop law LBT learning lease lecture ledger leducation Leverage Analysis liabilities lifo linkedin loan logical point loss loss of profit M.Com. m.phil malaysia management accounting manual accounting manufacturing account market marketing mastercard material MBA MCA media migration mobile money ms word ms. excel multi currency in tally 9 Multicurrency Accounting mutual fund national security new and sacrifice ratio new york times new zealand news NGO nonprofit-accounting North Georgia Mountains NPV NSE odbc office oman online application online accounting Online Accounting Course otcei pakistan parents Partnership pay pal pdf Personal Finance pie chart pie chart of income pnb podcast ppf presentation price privacy policy prize money prof. vinod kumar profit profit and loss account project management provision purchase puzzles quickbooks Quote quotes quotes of svtuition rating agency ratio analysis RBI readers real estate rectification of errors remote control reports reserves responsibility accounting retirement revenue Revenue reserves review risk rupees salary sale saudi arabia saving sbi scholarship school SEBI security service tax share share trading Shares shri lanka singapore sms social accounting society solution South Africa stock stock exchange structure student students study subsidiary company svtuition swiss bank tally tally 9 Tally 7.2 Tally 9 Tally.ERP 9 tanzania tax Tax Accounting TDS teacher teaching technology test testimonial testimonials thailand tips trading trading on equity transaction trend trial balance truthfulness tuition twitter UAE UGC - NET Commerce UK United Arab Emirates university usa valuation VAT Video Voucher and vouching Wealth wikipedia working capital youtube
Accounting Education: Cash Flow to Debt Service Ratio
Cash Flow to Debt Service Ratio
Accounting Education
Not found any lecture VIEW ALL Continue reading Reply Cancel reply Delete By Home PAGES Lectures View All RECOMMENDED FOR YOU Category ARCHIVE SEARCH ALL Lectures Not found any lecture match with your request, please help to write it and send it to our email at for making this website free accounting and finance encyclopedia. Back Home Sunday Monday Tuesday Wednesday Thursday Friday Saturday Sun Mon Tue Wed Thu Fri Sat January February March April May June July August September October November December Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec just now 1 minute ago $$1$$ minutes ago 1 hour ago $$1$$ hours ago Yesterday $$1$$ days ago $$1$$ weeks ago more than 5 weeks ago Followers Follow THIS CONTENT IS PREMIUM Please share to unlock