Cash Dividend Coverage Ratio is used by investors to assess the solvency of the company with regard to its shareholders. The higher the value of the indicator, the better the solvency of the enterprise.
Alternative names of the Cash Dividend Coverage Ratio:
- Cash Dividend Coverage Ratio
- DPR – Dividend Payout Ratio
- DCR –Dividend Coverage Ratio
What Does the Cash Dividend Coverage Ratio Show?
The indicator reflects the company’s ability to pay dividends at the expence of its operating activity. Short-term obligations may also be used to determine the ability of an enterprise to pay the investors’ interest after repaying the main debt.
Formula of the Cash Dividend Coverage Ratio
CDCR = Operating cash flow / Dividends paid
CDCR = (Operating cash flow – Long-term liabilities) / Dividends paid
Normative Value of the Cash Dividend Coverage Ratio
The recommended value of the Cash Dividend Coverage Ratio should exceed 1. Otherwise the company will have to attract funds generated by the other activities, which influences the overall inefficiency of the company’s finances. However, for most enterprises, the value of the indicator exceeds 1. Therefore, in order to investigate the effectiveness of the activity from the investor’s point of view, this indicator should be analyzed in its dynamics taking the average values into account.