Module 22.2 LOS 22.m: FCFF/FCFE Coverage Ratios

Dividend safety metrics are used to analyze the probability that dividends will continue in the future. A few commons ones are the dividend payout ratio:

                Dividend payout ratio = dividend / net income

The dividend coverage ratio:

                Dividend coverage ratio = net income / dividend

And the FCFE Coverage Ratio:

                FCFE coverage ratio = FCFE / (dividends + share repurchases)

Where (one option of FCFE calculation):

                FCFE = cash flow from operations − FcInv + net borrowings

An FCFE coverage ratio that is much less than one indicates that a company has to finance dividends using cash reserves, which is not a sustainable practice.

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