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Cash Sufficiency Of A Company(PartA)

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We have looked at the articles:Profit Versus Cash & Accounting on Cash Basis Versus Accrual basis.We should able to understand that the vein of an organization is its cash flow. We also have reviewed the Cash Flow Statement which is an integral part of the financial statements and a very critical report to see how the company’s monies being utilized.

Here,this article showed that we can derive useful ratios from the cash flow statement to assist us to evaluate the cash sufficiency of the entity.

When we say cash sufficiency of an entity, we basically mean the adequacy of the cash flows to meet the entity’s cash needs for long-term debt payments, dividends and acquisition of non-current assets.

This should not be confused with cash flow efficiency of the entity which is really the efficiency with which the entity generates cash from its revenues, profits and assets.

Let’s look at the ratios for Cash flow namely :

  • CASH SUFFICIENCY RATIO(PARTA) and
  • Cash flow Efficiency(PartB)

 

Ratios For Cash Sufficiency

(a) Cash flow adequacy:

Purpose: to measure the entity’s ability to cover its main cash requirements

Formula:

Cash from operations

Long term debt paid + Assets Acquired + Dividends paid

(b) Long-term debt repayment

Purpose: to measure the entity’s ability to cover its long term debt out of cash from operations

Formula:

Long term debt repayments

Cash from operations

(c ) Dividend payment

Purpose: to measure the entity’s ability to cover its dividend payments.

Formula:

Dividends paid

Cash from operations

(d) Reinvestment

Purpose: to measure the entity’s ability to pay for its non-current assets out of cash from operations

Formula:

Non-current asset payments

Cash from operations

(e) Debt Coverage

Purpose: to measure the payback period for coverage of long-term debt.

Formula:

Total long-term debt

Cash from operations

This entry was posted on Wednesday, October 17th, 2007 at 7:39 am and is filed under c. Cash Flows, d. Interpretation. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

One Response to “Cash Sufficiency Of A Company(PartA)”

  1. Snapshot Of All Articles Under The Heading Of Cash Flows Statements | MBA Accounting Says:
    March 19th, 2008 at 10:00 pm

    […] Cash Sufficiency Ratio Of A Company(PartA) […]

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