Cash Flow Adequacy Ratio Calculator

Formula

The formula to calculate the Cash Flow Adequacy Ratio is:

\[ R = \frac{NC}{CE + DR + D} \]

Where:

$R$ is the cash flow adequacy ratio
$NC$ is the net cash provided by operating activities
$CE$ is the capital expenditures
$DR$ is the debt repayments
$D$ is the dividends paid

What is Cash Flow Adequacy Ratio?

The cash flow adequacy ratio is a financial metric that measures a company’s ability to cover its capital expenditures, debt repayments, and dividends with the cash generated from its operating activities. This ratio is crucial for investors and creditors as it indicates the financial health and sustainability of a company. A higher ratio suggests that the company generates sufficient cash flow to meet its financial obligations and invest in its growth, while a lower ratio may indicate potential liquidity issues.

Example Calculation 1

Let's assume the following values:

Net Cash Provided by Operating Activities (NC) = \$100,000
Capital Expenditures (CE) = \$30,000
Debt Repayments (DR) = \$20,000
Dividends Paid (D) = \$10,000

Using the formula:

\[ R = \frac{100000}{30000 + 20000 + 10000} = 1.67 \]

The Cash Flow Adequacy Ratio is 1.67.

Example Calculation 2

Let's assume the following values:

Net Cash Provided by Operating Activities (NC) = \$150,000
Capital Expenditures (CE) = \$50,000
Debt Repayments (DR) = \$30,000
Dividends Paid (D) = \$20,000

Using the formula:

\[ R = \frac{150000}{50000 + 30000 + 20000} = 1.50 \]

The Cash Flow Adequacy Ratio is 1.50.