What it means
A lender needs to know whether money arrives in time to pay debt, not only whether accounting earnings look positive. CADS starts from cash generated by operations and adjusts for cash items that must be paid before lenders under the deal's definitions.
It shows the amount left for scheduled interest and principal in that period. Project finance often uses a waterfall that puts receipts and payments in order.
Revenue enters, operating costs and specified taxes leave, necessary capital spending and working-capital movements are accounted for, and debt service follows. The contract can change the order or definitions, so a model should state each line rather than assume one universal formula.
Suppose a project receives $10 million from customers, pays $4 million to operate, $1 million of taxes, and $2 million of required maintenance capital spending, with no net working-capital change. Simplified CADS is $3 million.
If debt service is $2 million, coverage is 1.5 times, and the $3 million cash figure and the 1.5 ratio answer different questions. The World Bank explains debt service coverage as cash flow available for debt servicing divided by debt servicing in a given period.
That relationship makes CADS a numerator, not a percentage on its own. A coverage ratio below one signals a cash shortfall under the chosen assumptions, but a ratio above one still needs stress testing for timing and volatility.
EBITDA is not CADS, because EBITDA omits working-capital needs, tax cash payments, and capital expenditures that can be necessary to keep a project operating. A business can report strong EBITDA while receivables are slow to collect and equipment requires cash repairs.
A model should reconcile profit measures to actual cash available before making a debt decision. Period matching matters, since annual CADS compared with one month's debt service produces a meaningless high ratio.
Align receipts, spending, interest, and principal to the same dates, because a project with enough cash across a full year can still miss a June payment if receipts arrive in September and no reserve or facility bridges the gap. CADS is forward-looking in a lending model but can also be reconstructed historically, so document each assumption and sensitivity, and show the waterfall, scheduled debt service, coverage and covenant headroom in the management report.
In practice
Real-world examples.
Example
A plant shows $6 million of EBITDA but needs $2 million of maintenance equipment and $1 million in additional inventory. Its CADS is materially below EBITDA before considering cash tax and other items.
Example
A project forecasts $4 million CADS against $3 million debt service. The 1.33 coverage looks adequate in the base case, but a delayed customer payment could cause a temporary shortfall.
Example
A financing covenant excludes proceeds from a one-time asset sale from its CADS definition. The finance team calculates the contractual measure instead of counting the receipt as routine cash generation.
Formula
Calculation
Illustrative CADS = Operating cash receipts - Operating cash payments - Cash taxes - Required maintenance capital spending - Net working-capital investment, using the financing agreement's definitions
DSCR = CADS / (Scheduled principal + Interest for the same period)
Worked example. A fictional project collects $10 million, pays $4 million in operating costs, $1 million in cash taxes and $2 million in maintenance capital spending, with no working-capital change.
- CADS = $10 million - $4 million - $1 million - $2 million = $3 million.
- With $2 million of scheduled debt service, DSCR = $3 million / $2 million = 1.5.
- CADS remains $3 million, not 1.5. If a $0.5 million working-capital investment is added, CADS falls to $2.5 million and DSCR to 1.25.
State each line of the waterfall so the calculation matches the loan definition.Case study
Seen in the real world.
Fictional example: Wind-farm controller Mara forecast $12 million of annual revenue and reported comfortable accounting profit. A turbine maintenance contract, however, required a large cash payment before the next loan instalment. Her first model used EBITDA as a stand-in for lender cash.
Mara rebuilt a monthly waterfall, with collections, taxes, maintenance, and debt payments. The year still showed enough total CADS, but one quarter fell below required coverage. She arranged an approved cash reserve and changed the maintenance payment schedule where feasible.
Watch out
Common mistakes.
- Calling CADS itself a ratio or comparing it with debt service measured over a different period.
- Substituting EBITDA for cash after taxes, working-capital changes, and necessary capital spending.
- Counting one-off asset sales, reserve withdrawals, or new borrowing as recurring project cash without checking the loan definition.
Questions
People also ask.
Is CADS the same as DSCR?
No. CADS is a cash amount; dividing it by debt service over the same period produces the coverage ratio.
Does positive CADS guarantee payment?
No. The amount may be less than scheduled debt service, or cash can arrive after a payment date.
Why can CADS differ from EBITDA?
Cash taxes, working-capital movements, and capital spending can absorb cash even when earnings before those items look strong.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%