Comparing operating cash flow to the size of a company’s debt obligations can give investors and analysts an idea of how capable a company is of paying of its debts.

This ratio compares the size of a company’s cash flow from operations to the size of its debt, in an effort to get an idea of how capable a company is of paying off its debt obligations, and how long it would take if all cash flow were diverted to debt service.

Even though this scenario is not likely to happen, the ratio is still useful. Some people prefer to use free cash flow or EBITDA instead of operating cash flow. Free cash flow reduces cash flow by the amount of typical expenditures, while EBITDA looks at earnings before any accounting decisions reduce it.

Cash flow from operations does not add back in taxes and whatnot like EBITDA (which is probably not advisable for debt service because the only thing worse than not paying off debts is not paying taxes), but it does include updated information on receivables, payables, and inventory, which is useful for getting a current snapshot.

Investors may not want to invest in a company that is overly leveraged.