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QuestionsCategory: Financials QuadrantDebt to Net Profit ratio vs Debt to CashFlow ratio
Yong asked 3 years ago

Hi, Debt to CashFlow ratio seemed a better ratio to measure available liquidity of company to pay off debts based on net cashflow activities. 
In what situation will we be using Debt to Net Profit ratio, and how is it used/measured? Thanks

1 Answers
Victor Chng answered 3 years ago

Hi Yong,
 
In most case, we will used debt to cash flow but sometime the company cash flow may be lower because they may to spend some money on their working capital such as inventory, receivables or payables. In such cases, the debt to cash flow cannot show the full picture, hence it is better to use debt to net profit. 

Yong replied 3 years ago

Thanks, Victor! In this case, is there any rule of thumb / ratio figure to observe?

Victor Chng replied 3 years ago

At least 5x for less.