What is a cash debt coverage ratio in real estate?

What is a Cash Debt Coverage Ratio?

The cash debt coverage ratio in real estate, like in other industries, is a financial metric that evaluates the ability of a company (or property) to cover its debt obligations with its operating cash flow. This ratio is particularly important in real estate due to the capital-intensive nature of property investments and the significant levels of debt often used to finance these investments.

To calculate the cash debt coverage ratio, you divide the net cash provided by operating activities (found on the cash flow statement) by the total debt of the company (which can include both short-term and long-term debt found on the balance sheet). The formula looks like this:

This ratio provides insight into how well the cash generated from the real estate operations can cover its current debt obligations, offering investors and lenders a measure of the financial health and risk associated with the real estate investment. A higher ratio indicates a better ability to cover debt obligations from operating cash flow, suggesting lower financial risk. A lower ratio could indicate potential difficulties in meeting debt obligations, signaling higher risk.