Understanding Cash Available for Debt Service (CADS): Definition, Calculation, and Financial Implications

In the complex landscape of finance, the concept of cash available for debt service (CADS) stands as a fundamental metric, providing a pragmatic evaluation of a company’s liquidity in relation to its impending debt service obligations. This article aims to dissect the intricacies of CADS, shedding light on its calculation methods, applications, and the nuanced significance it holds within the finance industry.

Cash available for debt service (CADS) serves as a numerical indicator, quantifying the cash reserves a company possesses to fulfill its debt service obligations within a given calendar year. These obligations encompass both interest payments and principal repayments, considering various cash inflows and outflows. Often deployed in project finance, CADS plays a pivotal role in determining the viability of investments or ventures. Additionally, it serves as a key input in financial coverage ratios such as debt service coverage ratio (DSCR), loan life coverage ratio (LLCR), and project life coverage ratio (PLCR).

The calculation of CADS involves multiple approaches, with common starting points being either EBITDA (earnings before interest, taxes, depreciation, and amortization) or receipts from customers. The formula entails meticulous netting out of revenue, operating expenditure, capital expenditure, tax, and working capital adjustments, providing a comprehensive snapshot of the available cash.

CADS finds extensive application in project finance, contributing significantly to the cost-benefit analysis of long-term projects. This holistic evaluation spans the entire life cycle of a venture, assessing its feasibility and its capacity to generate adequate cash flow to cover costs, ensuring it can sustain itself financially.

Expressed as a straightforward numerical ratio, a CADS ratio below 1 signals potential challenges for a company in meeting its debt obligations. A ratio exactly at 1 indicates the ability to fulfill obligations, albeit leaving no immediate funds on hand. Conversely, a ratio surpassing 1 implies the company can service its debt with surplus funds. Investors tend to favor companies maintaining healthy CADS ratios, striking a balance between meeting obligations and prudent spending.

CADS can be calculated using various methods, often starting with EBITDA or receipts from customers. The formula entails meticulous adjustments for revenue, operating expenditure, capital expenditure, tax, and working capital.

CADS holds significant importance in project finance as it aids in evaluating the feasibility of long-term investments, ensuring they generate sufficient cash to cover costs over their life cycle.

A CADS ratio exceeding 1 implies that the company not only can meet its debt obligations but also has surplus funds, indicating a financially robust position.