QualityFCF#69
Dividend Coverage Ratio expresses how efficiently a company converts capital into earnings.
By Javier Sanz, Founder & Lead AnalystEditorially reviewed
Last updated: Reviewed by: Javier Sanz
Formula
Operating Cash Flow - Capital Expenditures
Description
The cash a business generates after accounting for capital expenditures needed to maintain or expand its asset base. Warren Buffett calls this "owner earnings" and considers it the most important number for valuing a business. FCF represents money that can be returned to shareholders through dividends and buybacks or used for acquisitions and debt paydown.
Interpretation
Positive and growing FCF is essential for sustainable shareholder returns. Negative FCF in a mature company is a red flag. Compare FCF to net income: FCF consistently above net income signals high-quality earnings. FCF below net income over multiple years suggests aggressive accounting or heavy reinvestment needs.
Related metrics: Return on Equity (ROE), Return on Assets (ROA), Return on Invested Capital (ROIC). (Updated 2026)
Further Reading
- SEC EDGAR primary filings on Dividend Coverage Ratio- Primary source filings used to calculate Dividend Coverage Ratio.
FAQ
How is Dividend Coverage Ratio calculated?+
Dividend Coverage Ratio uses the formula: Operating Cash Flow - Capital Expenditures. compare against sector median on /screener with the Sector filter applied. ValueMarkers refreshes the calculation within 24 hours of each new SEC filing using SEC EDGAR 10-K + 10-Q filings (segment-level disclosures).
What is a good Dividend Coverage Ratio value by sector?+
There is no single 'good' value for Dividend Coverage Ratio — context is sector-driven. compare against sector median on /screener with the Sector filter applied. The /screener exposes sector-relative percentiles for Dividend Coverage Ratio on every ticker, so you can compare against the sector median rather than the broad-market median.
Which investors use Dividend Coverage Ratio?+
Charlie Munger, Joel Greenblatt, Terry Smith cite Dividend Coverage Ratio as a key input to to find compounders with durable economic moats. The academic anchor is Greenblatt (2005) Magic Formula and Mauboussin (2014). ValueMarkers weights this within the Quality pillar of the VMCI score (30% of total).
What are the limitations of Dividend Coverage Ratio?+
Dividend Coverage Ratio can mislead in asset-light businesses where conventional capital ratios mislead. Pair Dividend Coverage Ratio with at least two cross-checks from other VMCI pillars — for example, free cash flow trend, balance-sheet quality, and earnings consistency — before drawing a single-metric conclusion.
Where can I see live Dividend Coverage Ratio data?+
Visit any /stock/[ticker] page on ValueMarkers to see live Dividend Coverage Ratio data, sector percentiles, and the VMCI composite score that integrates Dividend Coverage Ratio with 119 other indicators across 100,000+ stocks. The free /screener exposes Dividend Coverage Ratio as a filterable column.
Used in these guides
Related Quality Indicators
Return on Equity (ROE)Op Margin
Return on Equity measures how efficiently a company converts capital into earnings.
Return on Assets (ROA)Net Margin
Return on Assets is the metric used to how efficiently a company converts capital into earnings.
Return on Invested Capital (ROIC)EBITDA Margin
Return on Invested Capital measures how efficiently a company converts capital into earnings.
Return on Capital Employed (ROCE)FCF Margin
Return on Capital Employed is the metric used to how efficiently a company converts capital into earnings.
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