Definition:
Cash Interest Paid refers to the actual cash outflow a company incurs to meet its interest obligations on debt during a specific period. It represents the amount of cash that has been paid to creditors as interest on borrowed funds.
Formula:
Cash Interest Paid = Interest Expense - Change in Interest Payable
How to use the metric:
Cash Interest Paid is used to assess a company's liquidity and cash flow management. It helps investors and analysts understand how much cash is being used to service debt, which can impact the company's ability to invest in growth opportunities or meet other financial obligations.
Limitations:
This metric does not account for non-cash interest expenses, such as amortization of bond discounts or premiums. It also does not reflect the total interest expense recognized in the income statement, which may include accrued interest not yet paid in cash.
Applies to:
Cash Interest Paid is relevant for industries with significant debt financing, such as utilities, real estate, and manufacturing, where understanding cash flow related to debt servicing is crucial.
Doesn't apply to:
Industries with minimal debt financing, such as technology startups or service-based companies, may find this metric less relevant as they may not have significant interest obligations impacting their cash flow.
Summary:
Cash Interest Paid is a key metric for evaluating a company's cash flow related to debt servicing. It provides insights into the company's liquidity and financial health by showing the actual cash outflow for interest payments. However, it does not capture non-cash interest expenses and may be less relevant for industries with low debt levels.
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