What is a good RCF to net debt ratio?

There is no single answer. An agency judges the ratio against its assessment of the company's business risk, so a regulated network with predictable revenues can carry a lower ratio for a given rating than a business exposed to prices or volumes. The agencies publish the ranges they use in their sector methodologies, and companies often state their own targets. Read any figure against the sector and the agency, not against a general benchmark.

Why do rating agencies deduct dividends?

Because, in practice, a company that has promised its shareholders a steady dividend will pay it before it reduces debt. Deducting it shows the cash genuinely available to creditors and to fund investment without new borrowing. It also makes the ratio sensitive to financial policy: a board that raises its payout weakens the ratio at once, which a measure struck before dividends would not show.

Does a scrip dividend improve RCF to net debt?

Usually, yes. When shareholders take new shares instead of cash, the cash dividend falls, so retained cash flow rises by the amount taken in shares. In the example on this page, 40 of a 140 dividend taken in shares lifts the ratio from 7.1% to 8.8%. The effect lasts only as long as shareholders keep choosing shares, and the extra shares carry their own future dividends.

// WORKED EXAMPLETHE ARITHMETIC A DECISION RESTS ON

Retained Cash Flow to Net Debt: a Worked Example

The cash a company keeps, measured against what it owes.

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED 2026-11-07 · 5 MIN READ

// THE SHORT ANSWER

Retained cash flow to net debt asks how quickly a company could pay down what it owes from the cash it holds on to after paying its shareholders. That makes the dividend part of the credit reading: two utilities with the same earnings and the same debt score differently if one pays out more. It comes from rating analysis, and appears in the UK energy regulator's financeability tests and in utilities' own financial targets. A banker lending to a rated borrower reads it to anticipate the agency and to see how much of an investment programme the company is funding itself.

BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.

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PART OF Credit Analysis for Beginners

// 01 — WHY THE DIVIDEND COMES OUT FIRST

Funds from operations, or FFO, is the recurring cash a company generates after interest and tax and before working capital. A company that pays most of it out as dividends has little left to reduce debt or fund investment, and has to borrow for both. Retained cash flow takes the dividends out, so the ratio shows only the cash that stays in the business to serve creditors. It treats the dividend as a commitment rather than a choice, which for a listed utility whose investors expect a steady payout is close to how its board sees it.

The measure is met mostly on large rated borrowers: electricity and gas networks, water companies, airports. In the UK, Ofgem's 2019 guidance for the RIIO-2 price controls lists it beside FFO to net debt among the ratios it uses to judge whether transmission and gas distribution companies can finance their plans, and those companies' licences require them to keep an investment-grade rating. A mid-market borrower without a rating seldom meets it in a facility agreement.

// 02 — HOW IT IS CALCULATED

FFO = cash from operations before working-capital

changes, after interest and tax paid

Retained cash flow = FFO − dividends paid

RCF to net debt = retained cash flow ÷ net debt

Both halves are usually the agency's figures, not the company's. Net debt is the agency's adjusted figure: borrowings less cash, with items such as lease liabilities and pension deficits added, and part of any hybrid capital treated as equity. The dividend deducted is the cash paid, so a dividend that shareholders take in new shares reduces it. Regulators adapt the formula to their sector; Ofgem's version, for example, also deducts from FFO the inflation uplift accrued on index-linked debt. A company's published ratio may therefore not match a plain calculation from its accounts, and a banker using a figure records whose definition it is.

// 03 — THE EXAMPLE

An electricity distribution network with a public credit rating, constructed for this page like every figure in it, reports for the year in US$m:

FFO 310

Dividends paid in cash − 140

Retained cash flow 170

Adjusted net debt 2,400

RCF to net debt: 170 ÷ 2,400 = 7.1%

FFO to net debt: 310 ÷ 2,400 = 12.9%

Dividend raised to 190: 120 ÷ 2,400 = 5.0%

40 of the 140 taken in shares: 210 ÷ 2,400 = 8.8%

300 more debt for a programme: 170 ÷ 2,700 = 6.3%

Raising the dividend by 50 moves RCF to net debt down by about two percentage points and FFO to net debt not at all; the network's assets, earnings and borrowings are unchanged. A scrip dividend, where shareholders take new shares instead of cash, moves it the other way, which is why some utilities offer one during heavy investment. The last line shows the slower pressure: a capital programme funded by borrowing adds to net debt years before the new assets add to FFO. These percentages are the example's. Where an agency draws its lines depends on its view of the business, and is set out in its own methodology.

// 04 — HOW IT DIFFERS FROM FFO TO DEBT

FFO to debt and retained cash flow to net debt share a numerator down to the dividend line, so the distance between them is the payout. In the example it is 12.9% against 7.1%, a gap of 5.8 points that is simply 140 of dividends over 2,400 of debt. FFO to debt tells a banker how heavy the debt is against the cash the operations produce; the retained version adds how much of that cash the owners leave behind. A company can improve the first only by earning more or owing less. It can move the second at its next board meeting.

Neither is usually a bank's covenant ratio. A facility for a rated utility may carry a margin grid tied to the rating, or a simple gearing test, rather than a cash flow ratio of the agency's kind. The banker reads the agency's measure because the rating, and the price of every facility tied to it, depends on it.

DEFINED IN ONE PARAGRAPH → · FFO TO DEBT → · DIVIDEND PAYOUT RATIO →

// 05 — WHERE IT DECIDES A FILE

A banker covering a rated utility models the ratio before the client sets its dividend, launches a capital programme or buys an asset, because those are the decisions that move it and the client's question is whether the rating holds. The answer shapes the financing: a scrip dividend, a slower programme, new equity or hybrid capital, or acceptance of a lower rating and the higher margin a pricing grid then charges.

For an unrated borrower the idea has a plainer use. A lender asking how long a family-owned business would take to repay its debt from what it keeps after dividends or owner drawings can compute the same ratio on its own definitions. It often shows that the payout, not the earnings, sets the pace of repayment.

CORPORATE LENDING → · DEBT TO EBITDA →

// SOURCES

The documents the statements on this page rest on. Each was opened and checked when cited.

Ofgem, Financeability Assessment for RIIO-2: Further Information, 26 March 2019 — Financial Ratios (slide 6) — Defines RCF to net debt as FFO after cash interest, less dividends and principal inflation accretion, over net debt, lists it among the regulator's financeability ratios, and notes the licence requirement to keep an investment-grade rating — sections 01 and 02.

// QUESTIONS PEOPLE ASK

What is retained cash flow?: Retained cash flow is funds from operations less dividends paid: the recurring cash a company generates after interest and tax, before working-capital movements, minus what it pays its shareholders. It is the cash the company keeps to invest or to reduce debt. Rating agencies use it in ratios against debt, and it is a stricter measure than funds from operations alone for any company with a high payout.
What is a good RCF to net debt ratio?: There is no single answer. An agency judges the ratio against its assessment of the company's business risk, so a regulated network with predictable revenues can carry a lower ratio for a given rating than a business exposed to prices or volumes. The agencies publish the ranges they use in their sector methodologies, and companies often state their own targets. Read any figure against the sector and the agency, not against a general benchmark.
Why do rating agencies deduct dividends?: Because, in practice, a company that has promised its shareholders a steady dividend will pay it before it reduces debt. Deducting it shows the cash genuinely available to creditors and to fund investment without new borrowing. It also makes the ratio sensitive to financial policy: a board that raises its payout weakens the ratio at once, which a measure struck before dividends would not show.
Does a scrip dividend improve RCF to net debt?: Usually, yes. When shareholders take new shares instead of cash, the cash dividend falls, so retained cash flow rises by the amount taken in shares. In the example on this page, 40 of a 140 dividend taken in shares lifts the ratio from 7.1% to 8.8%. The effect lasts only as long as shareholders keep choosing shares, and the extra shares carry their own future dividends.

// NEXT TO IT

// ON WHOSE DESK

The seats that read this term in an ordinary week. Each page says what the seat is for, who arrives in it, and the shape of the round it runs.

Credit analystReads a borrower and writes the recommendation a decision-maker will act on.
Credit sanctionerHolds delegated authority and signs — or declines — the lending the front line brings.
Portfolio managerOwns the credit on a book after the money is out — reviews, covenants, ratings and early warning.

THE IN-TRAY · ONE MINUTE

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THE FIRST QUESTION · THE LOAN · CAPACITY

Two borrowers each carry debt of three times EBITDA. One sells software on three-year contracts; the other builds new houses for sale.

Is three times the same risk for both?

5 MORE ON THE LOAN · CAPACITY →WHERE DO YOU READ FROM? THE PLACEMENT →

THE READING ROOMIN ONE PARAGRAPHRetained cash flow (RCF) to net debt What is retained cash flow to net debt, and why does it deduct dividends?