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Calculates how well a company can cover yearly long term debt payments with its cash flow.[sc:kit02 ]
Cash Flow Adequacy Formula
Explanation of Cash Flow Adequacy
Cash Flow Adequacy (CFA) measures how well the company can cover the annual payments of all the long-term annual debt with the cash flow from its operating activities. This performance ratio can be calculated different ways, as the average value of the maturities might include the current year, plus several more years worth of Long Term Debt.
Importance of Cash Flow Adequacy
This performance ratio should usually have a value of 1.0, which would mean the company is able to at least cover its long-term annual debt using its Cash Flow from Operations. Occasionally a company may have more Long Term Debt, as they may make take on debt to handle emergencies or to fund expansions of its operations, but if the company is continually borrowing more over time than it can reasonably handle with its inflow of cash, then this might point to rough times ahead for the company.