Cash Available for Debt Service (CADS): Definition & Meaning

KEY TAKEAWAYS

• Cash available for debt service is a financial measure. 
• It shows how much of your cash balance is available for you to service your debt obligations. 
• CADS can also be used to figure out if an investment is viable or not. 

What Is Cash Available for Debt Service (CADS)?

Cash available for debt service is a financial measure. It shows how much of a cash cushion is available for you to service your debt obligations. This is for any annual debt service payable within one calendar year. 

The obligations include all of the business’s current interest payments and principal repayments. They also take several cash inflows and outflows into account. 

CADS is always shown as a straight number. This means that if the CADS rating process shows a ratio under 1, it shows that a company won’t be able to cover its debt repayments over the necessary period of time. If the rating process is at 1 then it means it will just about be able to pay its debts over the necessary period of time. If the ratio is above 1 then this shows that the company can service its debts and still have money left over for any additional cost. 

A lot of very financially secure companies will have CADS in triple figures. 

CADS can also be used by investors to figure out if an investment is viable or not. This is because it shows a company’s financial performance and structured finance. 

Ways to Calculate Cash Available for Debt Service

There are a few different ways for CADS to be calculated within the rating category. These are the two that are most commonly used. They both are set up with a cash flow waterfall model. This is where high-tier creditors receive principal and interest payments. And low-tier creditors receive their principal payments once the high-tier creditors are fully paid back. 

CADS Via Revenue

To calculate CADS using operating revenue or operating income: 

• You first start with EBITDA. 
• You then adjust for changes in net working capital expenditures. 
• After this, you subtract the total spent on capital expenditures, then adjust for any debt funding and equity.
• Finally, you subtract any tax losses.

CADS Via Customer Receipts

To calculate your CADS by using receipts from customers: 

• You start with your receivable from clients. 
• You then subtract any payments to employees and suppliers, as well as royalties and capital expenditure. 
• Finally, you subtract your cash income taxes. 

Summary

It’s vital for business owners to be able to make sure that they have the capital to service their debts. If your calculated CADS is under 1, then you have to make changes to ensure that you don’t put your company into unserviceable debt.