Cash Available for Debt Service (CADS)

What Is Cash Available for Debt Service (CADS)?

In the financial world, cash available for debt service (CADS) is a ratio that measures the amount of cash a company has on hand relative to its debt service obligations due within one calendar year. These obligations include all current interest payments and principal repayments and take into account several cash inflows and outflows.

CADS is also known as cash flow available for debt service (CFADS).

Understanding Cash Available for Debt Service (CADS)

Cash available for debt service (CADS) is expressed as a straight numeral. A CADS ratio under 1 indicates a company can't pay its debts, while a ratio at 1 means it can meet its obligations — but only just: Doing so will leave it with no immediate funds on hand. A ratio above 1 indicates the company can service its debt and have money left over. Many sound companies or projects have three-figure CADS.

CADS is often used in project finance, a cost-benefit analysis of the complete life-cycle of a long-term project or investment to determine if it is feasible, and will generate enough cash to cover its costs — to pay for itself, so to speak.

CADS is calculated by netting out revenue, operating expenditure, capital expenditure, tax, and working capital adjustments. It helps measure and determine various other debt repayment calculations and ratios, including debt service coverage ratio (DSCR), loan life coverage ratio (LLCR), and project life coverage ratio (PLCR).

Cash flows available for debt service often replace EBITDA (earnings before interest, taxes, depreciation, and amortization) in these calculations. CADS is considered a better indicator of a project’s ability to repay debt because it takes into account the timing of cash flows and the effects of taxes.

CADS should not be confused with its soundalike CAD. In the investment world, CAD stands for "cash available for distribution," and it refers to a real estate investment trust's (REIT) cash-on-hand that is available to be distributed as shareholder dividends.

Calculating Cash Available for Debt Service (CADS)

Cash available for debt service (CADS) can be calculated in a few different ways. Two are particularly common. Both set up a cash flow waterfall model, a sort of balance sheet-cum-schedule that delineates incoming revenues, outgoing expenditures, and the timing of payments to different creditors or to service different debts.

CADS Using Revenue

CADS Using Receipts from Customers

Special Considerations

Lenders prefer loaning money to companies that boast high CADS ratios. The reason is simple: The higher the ratio is, the greater the cash cushion a company has to service its debts, and the less likely it is to default on its outstanding loans. In short, the higher the CADS ratio, the less risky the loan.

Instead of appearing on a company's balance sheet, CADS ratios may appear as covenants in debt agreements with lenders, as do DSCRs and other obligations.