Cash Available for Debt Service, or CADS, is the cash a business actually generates after paying every operating cost it cannot avoid, but before making any principal or interest payments. It is calculated by starting with operating cash flow (or EBITDA) and subtracting cash taxes, maintenance capital expenditures, and changes in working capital, while stripping out non-recurring items that will not repeat. Lenders rely on this figure because it answers the question that matters to them: after the lights stay on and the taxman is paid, how much cash is left to service debt?
The CADS Formula
The core calculation looks like this:
CADS = Operating Cash Flow + Non-Cash Charges − Maintenance Capital Expenditures − Changes in Working Capital − Cash Taxes Paid ± Non-Recurring Adjustments
Most analysts begin from one of two starting points. The first is EBITDA, which requires adding back depreciation and amortization (already excluded from EBITDA) and then subtracting cash taxes, maintenance capex, and working capital changes. The second, often more reliable starting point 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 number.
What the formula produces is the cash generated by the business after every obligation except debt payments. That pre-debt focus is the whole point. CADS isolates the cushion available to lenders from everything else competing for the company’s cash.
A Worked Example
A simplified calculation for a mid-sized industrial company makes the mechanics concrete:
- EBITDA: $12,000,000
- Cash taxes paid: −$2,400,000
- Maintenance capital expenditures: −$1,800,000 (replacing worn equipment; excludes the $3,000,000 spent on a new production line, which is growth capex)
- Increase in working capital: −$600,000 (receivables grew with higher sales)
- Non-recurring legal settlement received: +$500,000, excluded from CADS because it will not repeat
CADS = $12,000,000 − $2,400,000 − $1,800,000 − $600,000 = $7,200,000
That $7,200,000 is the cash available to cover scheduled principal and interest for the year. If total debt service is $5,500,000, the Debt Service Coverage Ratio is $7,200,000 ÷ $5,500,000 = 1.31x. The one-time settlement is deliberately excluded; including a windfall would inflate the picture of what the business can sustain going forward.
Notice the $3,000,000 new production line does not reduce CADS. That expansion is a choice, not a necessity, and in project finance especially, major additions are typically funded with their own debt and equity rather than existing operating cash flow.
The Adjustments That Make or Break the Number
The difference between a reliable CADS and a misleading one lives in the adjustments. Each one is where a borrower has an incentive to be generous and a lender has a reason to push back.
Maintenance Capex vs. Growth Capex
Maintenance capex is the spending required to keep existing assets running 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 is subtracted from CADS.
The line between the two is rarely clean. A new roof might extend a building’s life by 30 years, or it might replace a leaking one at the end of its useful life. Borrowers have a natural incentive to classify as much spending as possible as “growth” to lift CADS, which is why loan agreements frequently include a minimum maintenance capex floor, negotiated as a fixed dollar amount or a percentage of revenue. When the floor exceeds actual maintenance spending in a period, the higher floor is used in the calculation. This prevents borrowers from deferring necessary upkeep to make coverage ratios look better on paper.
Working Capital Changes
Working capital is the cash tied up in day-to-day operations: inventory, receivables, and payables. When it increases, cash is absorbed into the business and unavailable for debt service. When it decreases, cash is freed up.
Analysts typically normalize working capital as a percentage of revenue rather than using whatever the financial statements happen to show. A company could temporarily boost CADS by running inventory down to unsafe levels or stretching supplier terms past the breaking point. Normalizing to a structural percentage keeps those short-term tactics from distorting the picture of sustainable capacity.
Cash Taxes Paid
The tax expense on the income statement and the cash actually sent to the government in a period are usually 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 add to cash taxes. Even companies that have reduced their regular tax bill through credits may owe a 15% minimum on book income, which raises the cash taxes paid line and reduces CADS in the period the payment is made.
Non-Recurring Items
CADS should reflect what the business can sustain, not what happened to land in one particular period. A one-time insurance recovery, a gain on a warehouse sale, or a large legal settlement all need to be stripped out. If a CADS figure includes a $2 million asset sale that will not repeat, any forward projection based on it will be $2 million too optimistic.
Lease Payments
Since the adoption of ASC 842, both operating and finance leases sit on the balance sheet, which complicates how lease payments interact with debt covenants. Obligations that were previously off-balance-sheet are now visible as liabilities, affecting leverage-based covenants and fixed charge coverage calculations. For CADS, the key question is whether a given lease payment is treated as an operating expense (deducted before CADS) or as a debt-like obligation (included in the debt service that CADS is measured against). Credit agreements usually define this explicitly, and the answer varies by deal. When reviewing a loan agreement, the treatment of lease obligations in the CADS definition is one of the first things to check.
How CADS Feeds the Debt Service Coverage Ratio
CADS exists primarily to serve as the numerator in the Debt Service Coverage Ratio, the single most important metric lenders use to assess whether a borrower can handle its debt load.
DSCR = CADS ÷ Total Debt Service
Total debt service is all principal and interest due in the measurement period, typically the next twelve months. A DSCR of 1.0x means the borrower generates exactly enough cash to cover payments, with no room for error. A DSCR of 1.25x means the borrower produces 125% of what is needed, leaving a 25% cushion against shortfalls.
Minimum DSCR covenants are written into loan agreements to preserve that cushion, and 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, while lower-risk assets like regulated utilities may see minimums closer to 1.15x.
Because CADS drives the DSCR, and the DSCR drives covenant compliance and the amount lenders are willing to advance, every judgment call in the CADS calculation flows straight through to how much a borrower can borrow and whether existing agreements stay in good standing.
How CADS Differs From EBITDA, Free Cash Flow, and Net Income
These four metrics all describe financial performance, but they answer different questions, and confusing them leads to mispriced debt and blown covenants.
EBITDA strips out interest, taxes, depreciation, and amortization to show operating profitability before financing and accounting conventions. It is useful for quick comparisons across companies, but it is 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 in some conventions and is designed to show what is left for equity holders, not what is available to pay lenders. It also subtracts growth capex, which is discretionary. CADS is calculated before debt payments and deducts only maintenance capex, focusing strictly on the cash cushion available for obligations. In project finance, this distinction is especially clear: growth-stage capital expenditures are funded with their own financing, so deducting them from the cash flow supporting existing debt would understate true capacity.
Net Income is the least useful indicator of debt repayment ability. It is an accounting figure 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 cash. It can also report a net loss while generating plenty of cash to service debt, if the loss is driven by large non-cash charges like goodwill write-downs. Sizing debt off net income is a fundamental error.
The practical test, when someone quotes an EBITDA multiple to justify a debt load, is always the same: what does CADS look like after paying for the capex and taxes that EBITDA ignores? The gap between EBITDA and CADS is where overleveraged deals are born.