Question

4. Briefly describe each of the 3 sections of a cash flow statement. 5. What do the following measure? How are they different? a. Debt Ratio b. Debt/EBITDA

Answer 1

4. The cash flow statement is divided into three segments, namely:

1. Cash flow resulting from operating activities;
2. Cash flow resulting from investing activities; and
3. Cash flow resulting from financing activities.

Operating activities: The operating cash flows refers to all cash flows that have to do with the actual operations of the business, such as selling products, etc.

Investing activities:Cash flow from investing results from activities related to the purchase or sale of assets or investments made by the company..

Financing activities: Cash flows from financing activities arise from the borrowing, repaying, or raising of money.

5. a. Debt ratio: Debt Ratio is a financial ratio that indicates the percentage of a company's assets that are provided via debt. It is the ratio of total debt and total assets.

b. Debt/EBITDA ratio: Debt/EBITDA ratio is calculated by dividing the debts by the Earnings before Interest, Taxes, Depreciation, and Amortization (EBITDA). The main target of this ratio is to reflect the cash available with the company to pay back its debts, and not how much income is being earned by the firm.

Debt ratio captures the financial position of the company, i.e. the leverage position of the company. Debt/EBITDA ratio captures the ability of the company to pay off its debt.