Cash Flow Adequacy Ratio indicates a company's capability of covering capital expense, debt repayment and dividends from cash flow generated from operating activities.
It is calculated as -
Cash Flow Adequacy Ratio = (Cash Flow from Operations) / ( Long-term debt paid + Fixed assets purchased + Cash dividends distributed)
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.