Dictionary of Accounting Terms: funds-flow-adequacy ratio
funds-flow-adequacy ratio
computation showing the extent to which a company can generate sufficient funds from operations to meet budgeted capital expenditures, increase in inventories, and cash dividends. Typically, a five-year total is used to eliminate cyclical and other distortions. The ratio equals:
A ratio of 1 shows the business has covered its needs based on attained levels of growth without having to resort to external financing. If the ratio is less than 1, there may be inadequate internally generated funds to maintain dividends and current operating growth levels.
