Wednesday, June 22, 2011

Cash Flow Adequacy Ratio

 
Cash Flow Adequacy Ratio indicates a company's capability of covering capital expense, debt repayment and dividends from cash flow generated from operating activities. 
 
Cash Flow Adequacy =            Net Cash flows from Operating Activities
                                                          Current Liabilities

Significance:
Cash flow adequacy is the primary measure of cash sufficiency. This performance ratio should have a value of 1 or higher. A ratio of 1 or more indicates that the company's operations produce sufficient cash to meet necessary business obligations. A ratio of less than one indicates potential liquidity problems.

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