Cash Flow Adequacy Ratio Calculator
Answers the Question
Can this firm cover its debt payments?
Calculator for Cash Flow Adequacy Ratio
What Is the Cash Flow Adequacy Ratio?
In general, the higher the ratio, the more likely a business will be able to cover its debts. Ratios below one indicate that the firm is unable to cover its debts, with increasingly small numbers indicating increasing levels of inability to pay.
Why Is it Important?
- Firms that are unable to cover their debt payments represent a massive risk to their owners. This is because the debts will continue to grow and take money away from potential opportunities for investment or profit-taking.
Formula(s) to Calculate Cash Flow Adequacy Ratio
- CASH FLOW ADEQUACY RATIO = CASH FLOW FROM OPERATIONS / (LONG TERM DEBT PAYMENTS + FIXED ASSET PURCHASES + CASH DIVIDENDS)
- Believing that debt payments must be stable. Rates could increase, or there could be balloon payments which would raise the need for increased payments.
- Believing that values are static. It's quite possible that revenues and costs could vary over time. Users of this formula would be wise to look at changes, both seasonal and long-term.