Debt Ratio Analysis - The Strategic CFO® (2025)

FAQs

How do you calculate CFO to total debt ratio? ›

How to calculate the cash flow to debt ratio? The calculation for the cash flow to debt ratio is very simple. You just need two numbers: your company's operational cash flow and its total debt. Once you have those figures, divide the former by the latter to get your company's cash flow to debt ratio percentage.

Cash Flow from Operations is used to calculate the amount of cash a company has generated from its operational activities during a specific period (e.g. annually). It is essentially the cash generated from the day-to-day core operations of the company.

Interpreting the Debt Ratio

If the ratio is over 1, a company has more debt than assets. If the ratio is below 1, the company has more assets than debt. Broadly speaking, ratios of 60% (0.6) or more are considered high, while ratios of 40% (0.4) or less are considered low.

A company's debt ratio can be calculated by dividing total debt by total assets. A debt ratio of greater than 1.0 or 100% means a company has more debt than assets while a debt ratio of less than 100% indicates that a company has more assets than debt.

Here's the formula to calculate a company's net CFO using the indirect method: Net cash from operating activities = Net income +/− depreciation and amortization +/− Change in working capital.

Do I need to worry about my debt ratio? If your debt ratio does not exceed 30%, the banks will find it excellent. Your ratio shows that if you manage your daily expenses well, you should be able to pay off your debts without worry or penalty. A debt ratio between 30% and 36% is also considered good.

Generally, a ratio over 1 is considered to be desirable, while a ratio lower than that indicates strained financial standing of the firm.

Successful CFOs partner strategically with the business to encourage behaviors that drive profitable growth and value realization through capital responsiveness. They also optimize board communication skills to ensure they can educate the board on big-picture issues and introduce new or complex topics.

Key takeaways

Debt-to-income ratio is your monthly debt obligations compared to your gross monthly income (before taxes), expressed as a percentage. A good debt-to-income ratio is less than or equal to 36%. Any debt-to-income ratio above 43% is considered to be too much debt.

Is a debt ratio of 0.7 good? ›

High debt ratio: If the result is a big number (like 0.7 or 70%), it means the company owes a lot compared to what it owns. This could be risky.

Your debt-to-income (DTI) ratio is how much money you earn versus what you spend. It's calculated by dividing your monthly debts by your gross monthly income. Generally, it's a good idea to keep your DTI ratio below 43%, though 35% or less is considered “good.”

You are planning to take a holiday with your family. Let's say you have 600,000$ in total assets and 150,000$ in liabilities. To calculate the debt ratio, divide the liability (150,000$ ) by the total assets (600,000$ ). This results in a debt ratio of 0.25 or 25 percent.

Common debt management rations include the debt-to-asset ratio, the debt-to-equity ratio, and the times interest earned (TIE) or the interest coverage ratio. These will tell you if your business is losing money and heading toward bankruptcy, or if your business can cover its interest expense on debt and pay it back.

A company's debt ratio can be calculated by dividing total debt by total assets.

What is the Operating Cash to Debt Ratio? The Operating Cash to Debt Ratio measures the percentage of a company's total debt that is covered by its operating cash flow for a given accounting period. The operating cash flow refers to the cash that a company generates through its core operating activities.

CFO to debt ratio is calculated as cash flow from operations divided by total debts. Compare companies that operate in the same industry as CFO to debt ratio differs from one industry to another. Cash flow operations refer to the amount a company generates from its continuous operating activities.