The Stages of Descent into Bankruptcy
Bankruptcy is a common phenomenon in the business world. There have been many cases wherein the stalwarts of yesterday, the companies which were running multi-billion dollar profits, have later filed for insolvency. For the benefit of the readers, let us define bankruptcy. Bankruptcy is the stage at which companies find it financially unviable to function. […]
Impact Investing: Where Profit Meets Social Responsibility
Finance as a force for good Even before the 2008 global financial meltdown, finance worldwide was not exactly successful at deflecting its reputation for greed and excess. But something has been happening on the periphery and is now very much at the core of the financial world; one that proves investing can generate both profitable […]
Replacement Cost Approach Advantages and Disadvantages
In the previous article, we have already witnessed what replacement cost theory is and how it can be used to value sporting franchises. We now know the theoretical aspects of this type of valuation. We also know that the replacement cost approach is not used very widely when it comes to the valuation of sports […]
Nominal and Real Value of Money
The previous article was an introduction about the two basic decisions that corporate finance helps a corporation in making. Prima-facie, these two decisions may look pretty simple. After all everyone raises money in their daily lives and puts it to productive use. Simple accounting can tell us whether or not we should make those financing […]
Relationship Banking in Commercial Banking
Commercial banking is fundamentally different from retail banking in several ways. One of the main differences between the two types of banking is the relationship management approach. The commercial banking system relies heavily on relationship management. Each and every corporate customer of a commercial bank has a dedicated relationship manager. This is possible because of […]
Cash Flow to Debt Ratio = Operating Cash Flow/Total Debt
The cash flow to debt ratio tells investors how much cash flow the company generated from its regular operating activities compared to the total debt it has. For instance if the ratio is 0.25, then the operating cash flow was one fourth of the total debt the company has on its books. This debt includes interest payments, principal payments and even lease payments to cover off balance sheet financing.
However, this may not be the case. Companies have access to a variety of financing schemes. Some of these schemes include interest only payments, bullet payments, balloon payments, negative amortization, so on and so forth. In such innovative amortization, there may be years when the company has to pay a lot of interest and other years when it has to pay none. Hence the present years figures may not be indicative of the future.
Earlier analysis used earnings because at that time credit periods were small or nonexistent and therefore earnings to some extent meant cash flow. However, with the proliferation of credit, the distinction has been widened.
A company may book earnings immediately and not receive cash for years on end. Thus creditors have their eyes set on cash flow ratios.
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