Cash Flow-to-Debt Ratio

Paying your bills and having cash on hand: It’s what separates you from Nicolas Cage.

If you’re measuring how much money you have coming in versus how much debt you have on your balance sheet, you’re more responsible than 98% of Americans.

This measurement, known as cash flow-to-debt ratio, is a metric that helps us know whether a person or company can stay liquid and meet its obligations. This is probably one of the most important ratios related to the capital structure of a company, as it’s a major proxy of knowing when it’s time to expand and when it’s time to...tighten the belt.

Measuring cash flow-to-debt tells us how much a firm is relying on debt to operate (because debt has additional costs, like interest, and reduces leverage potential as debt levels increase).

But there is such a thing as having too little debt. A low cash flow-to-debt ratio indicates that a company isn’t using one of the most powerful tools it can use to expand its business: Another person’s money.