Cash available for debt service, or CADS, is the cash a business actually generates in a period that could be used to pay principal and interest on its debt. You calculate it by starting with operating cash flow (or EBITDA), then subtracting cash taxes paid, maintenance capital expenditures, and any increase in working capital, and stripping out non-recurring items that won’t repeat. The result sits just above debt service in the cash flow waterfall, which is why lenders use it as the numerator of the Debt Service Coverage Ratio.
The Formula
The core equation is short:
CADS = Operating Cash Flow + Non-Cash Charges − Maintenance Capital Expenditures − Changes in Working Capital − Cash Taxes Paid ± Non-Recurring Adjustments
Most analysts start from one of two places. The first is EBITDA, which already excludes depreciation and amortization but needs cash taxes, maintenance capex, and working capital changes subtracted. The second is Operating Cash Flow taken straight from the Statement of Cash Flows, which already reflects working capital movements and cash taxes paid. Done correctly, both routes land on the same figure.
What the number represents is cash produced by the business after every obligation except debt payments. That pre-debt stopping point is the whole purpose. It answers what a lender actually wants to know: how much is left over once the business has kept itself running?
A Worked Example
Take a mid-sized industrial company with the following figures for the year:
- EBITDA: $12,000,000
- Cash taxes paid: $2,400,000
- Maintenance capital expenditures: $1,800,000 (replacing worn equipment)
- Increase in working capital: $600,000 (accounts receivable grew with higher sales)
- Non-recurring legal settlement received: $500,000
- New production line (growth capex): $3,000,000
CADS = $12,000,000 − $2,400,000 − $1,800,000 − $600,000 = $7,200,000.
If scheduled principal and interest for the year total $5,500,000, the DSCR is $7,200,000 ÷ $5,500,000 = 1.31x.
Two choices in that calculation deserve a closer look. The $500,000 legal settlement is excluded because a one-time windfall would make future debt capacity look stronger than it actually is. The $3,000,000 production line is also left out, because it is growth capex, not maintenance. In project finance especially, major expansions are typically funded with their own debt and equity, so they don’t depend on existing cash flows at all.
Adjustments That Make or Break the Number
The reliability of a CADS figure comes down to how carefully each adjustment is made. Skipping or misjudging any of these overstates what’s really available to lenders.
Maintenance Capex vs. Growth Capex
Maintenance capex is spending required to keep existing assets functioning at current capacity: replacing a failing compressor, resurfacing a parking structure, overhauling a turbine on schedule. Growth capex is spending to expand capacity or enter new markets. Only maintenance capex reduces CADS.
The line between the two is rarely clean. A new roof might add 30 years of life to a building, or it might replace a leaking one that’s past its useful life. Borrowers have an incentive to classify as much spending as possible as growth to inflate CADS, so loan agreements frequently include a minimum maintenance capex floor, often set as a fixed dollar amount or a percentage of revenue. When the floor exceeds actual maintenance spending in a given period, the higher floor amount is used in the CADS calculation. That stops a borrower from deferring upkeep to flatter the coverage ratio.
Working Capital Changes
Working capital is the cash tied up in day-to-day operations: inventory on shelves, invoices waiting on customer payment, bills owed to suppliers. When working capital rises, cash is being absorbed into the business and is unavailable for debt service. When it falls, cash is freed.
Analysts typically normalize working capital as a percentage of revenue rather than taking the raw figure from the statements. A company could temporarily inflate CADS by running inventory to dangerously low levels or stretching supplier payment terms past their breaking point. Normalizing to a structural percentage keeps those short-term tactics from distorting the picture of sustainable debt capacity.
Cash Taxes Paid
The tax line on the income statement and the cash actually sent to the government are often very different numbers. Deferred tax assets, timing differences on depreciation, and tax credits all create gaps. CADS uses the cash taxes paid figure from the Statement of Cash Flows, because that reflects money that has actually left the business.
For very large corporations with adjusted financial statement income exceeding $1 billion over three years, the corporate alternative minimum tax can create an additional cash tax obligation. Even companies that have reduced their regular tax liability through credits may owe a 15% minimum on their book income, which increases cash taxes paid and reduces CADS in the period it is paid.
Non-Recurring Items
CADS should reflect what the business can sustain, not what happened to show up in one period. A one-time insurance recovery, a gain from selling a warehouse, a large legal settlement payment: all need to come out. If the number includes a $2 million asset sale that won’t happen again, any forward projection based on that CADS will be $2 million too optimistic.
Lease Payments
Since the adoption of ASC 842, both operating and finance leases appear on the balance sheet, which affects leverage-based covenants and fixed charge coverage calculations because obligations that were previously off-balance-sheet are now visible as liabilities. For CADS purposes, the question is whether a lease payment is treated as an operating expense (deducted before arriving at CADS) or as a debt-like obligation (included in the debt service that CADS is measured against). Most credit agreements define this explicitly, and the answer varies by deal. When reviewing a loan agreement, the lease treatment inside the CADS definition is one of the first things to check.
How CADS Feeds the Debt Service Coverage Ratio
The main reason to calculate CADS is to feed it into the DSCR:
DSCR = CADS ÷ Total Debt Service
Total debt service includes all principal and interest payments due within the measurement period, usually the next twelve months. A DSCR of 1.0x means the borrower generates exactly enough cash to cover its payments. A 1.25x ratio produces 125% of what’s needed, leaving a 25% cushion against unexpected shortfalls.
Lenders build minimum DSCR covenants into loan agreements to maintain that cushion. The required minimum varies by asset class. Fannie Mae requires an underwritten DSCR of 1.25x for conventional multifamily loans and allows a lower 1.15x threshold for mission-driven affordable housing transactions.1Fannie Mae. Near-Stabilization Execution Term Sheet Infrastructure project finance deals commonly target 1.30x or higher, and lower-risk assets like regulated utilities may see minimums closer to 1.15x.
Lock-Up vs. Default Thresholds
In project finance, loan agreements typically define two DSCR levels. The lock-up threshold is the higher of the two. When the DSCR falls below it, distributions to equity holders are suspended, but the project isn’t in default. Cash that would have gone to sponsors stays in the project until the ratio recovers. The default threshold is set lower, and breaching it gives lenders the right to demand immediate repayment or take control of the project.
The two-tier structure gives projects breathing room. A temporary revenue dip that drops DSCR below lock-up is serious but manageable; a drop below the default threshold signals that debt service itself may be at risk.
What Happens When a Covenant Breaks
The most common first response is a cash sweep, where excess cash flow that would otherwise be distributed to equity is redirected to prepay loan principal. In project finance, 100% of excess cash is commonly swept until the ratio is restored. In more borrower-friendly corporate deals, the sweep percentage may be lower or tiered based on how far below the threshold the DSCR has fallen.
Many loan agreements also include equity cure provisions. An equity cure lets the borrower’s shareholders inject cash to restore the DSCR to compliance. The injected cash may be applied to reduce the outstanding loan balance, deposited into a lender-controlled account as additional security, or in some cases counted directly toward cash flow when retesting the ratio. Lenders typically cap the number of cures, often at two or three over the life of the loan.
If the breach isn’t cured, it can escalate to a technical default. At that point, the lender has the right to accelerate the loan, making the full balance immediately due. In practice, acceleration is a last resort; lenders generally prefer to negotiate because a forced sale rarely recovers full value.
Sizing Debt From CADS: Sculpting
CADS doesn’t just measure whether existing debt is serviceable. It also sets how much debt a project can take on in the first place. Debt sculpting shapes the repayment schedule to match projected cash flows rather than using a flat amortization.
The logic works backward from a target DSCR. If a lender requires a minimum 1.30x coverage ratio and the project is expected to generate $10 million in CADS during a given year, the maximum debt service for that year is $10,000,000 ÷ 1.30 = $7,692,308. Repeat the calculation across every year of the loan term and you get a repayment schedule that rises and falls with the project’s cash flow.
Sculpting matters most for projects with uneven profiles, like a toll road where traffic ramps up over several years or a power plant with seasonal demand. A flat repayment schedule would create dangerously low DSCRs in weak years and wastefully high ratios in strong ones. Sculpting smooths the coverage ratio across the loan’s life, maximizing the debt the project can support while keeping the lender’s required cushion in every period.
This is where projected CADS becomes critical. Historical CADS confirms past performance, but debt sizing depends entirely on forecasts, which require detailed revenue models, expense projections, and a realistic maintenance capex schedule. Overly optimistic projections are the most common path to a debt structure that works on the spreadsheet but fails in reality.
CADS vs. EBITDA, Free Cash Flow, and Net Income
These metrics all measure aspects of financial performance, but they answer different questions. Confusing them leads to mispriced debt and blown covenants.
EBITDA strips out interest, taxes, depreciation, and amortization to show operating profitability before financing costs and accounting conventions. It’s a quick comparability tool, but a poor proxy for debt capacity because it ignores cash taxes, maintenance spending, and working capital needs. A company with $20 million in EBITDA but $8 million in mandatory capex and $3 million in cash taxes has far less debt capacity than the headline suggests.
Free Cash Flow gets closer. It typically deducts all capital expenditures (both maintenance and growth) and cash taxes from operating cash flow. But FCF is calculated after debt service and is meant to show what’s available to equity, not what’s available to pay lenders. It also subtracts growth capex, which is a choice rather than a necessity. CADS is calculated before debt payments and deducts only maintenance capex, focusing on the cash cushion available to cover obligations. In project finance, growth-stage capital expenditures are funded with their own financing, so deducting them from the cash flow supporting existing debt would understate the project’s true capacity.
Net Income is the least useful indicator of debt repayment ability. It’s an accounting measure shaped by depreciation schedules, deferred tax provisions, non-cash impairments, and accrual timing. A company can report positive net income for years while quietly burning through cash. It can also report a net loss while generating plenty of cash to service its debt, if the loss is driven by large non-cash charges like goodwill write-downs. Sizing debt off net income is a fundamental error.
When someone quotes an EBITDA multiple to justify a debt load, the question to ask is what CADS looks like after paying for the capex and taxes that EBITDA ignores. The gap between EBITDA and CADS is where overleveraged deals are born.