This is simply a re-arranged cash flow statement with the
emphasis on debt servicing. The order of the major headings is as follows,
with outflows in brackets:
A. Cash from operations after tax (before debt service)
B. (Net interest payment)
C. (Scheduled loan repayments)
D. (Net capital expenditure)
E. Change in cash and new funding
This format looks to cash from operations as the primary source of funds for
payment of interest and scheduled loan repayments. It summarises the position
as if, pessimistically, maturing debt could not be refinanced with new loans.
Interest cover, on a cash flow basis, is defined as A/ B.
Debt service cover is defined as A/ (B+C).
This perspective also assumes that all capital expenditure, other than any
capitalised repairs and maintenance, is discretionary rather than necessary
spending or can be financed with new debt. It therefore presents capital expenditure
and associated new debt finance as logically related items, which come after
meeting existing debt obligations in full from internal cash flow.