Cash flow ratio is the tool which can be used to analyse the performance of an enterprise or in comparing between two enterprises while taking an investment decision. Cash flow ratios are an indication of financial capabilities and health of an organization. It helps in defining how solvent, viable and liquid a company is.
You can easily avail the data from the balance sheet and financial statement of an enterprise.
Here are some of the important cash flow ratios:
- Operating Cash Flow Ratio
- Current Ratio
- Cash/Price Flow Ratio
- Cash Flow Margin Ratio
- Current Liability Coverage Ratio
- Asset Efficiency Ratio
- Long Term Debt Coverage Ratio
- External Financing Index Ratio
Operating Cash Flow Ratio
Operating cash flow ratio is one of the most important ratios as it measures the capability of an enterprise to manage it’s liability from the cash generated from different operations.
Calcution Method
Divide the cash flows from operations from the current liabilities of the company.
It should always be greater than 1.
Current Ratio
It is the simplest tool to measure whether the company’s present assets are sufficient to meet the present debts.
Calculation Method
Divide the current assets from the current liabilities of the company.
If the magnitude is greater than 1, the liabilities are well managed by the company or we can say that the company’s assets are more than it’s liabilities.
Cash Flow Margin ratio
This ratio measures the ability of a company to convert its sales into cash.
Calculation Method
Divide the cash flow from operation from net sales.
The larger the value the better is the enterprise.
Cash /Price Flow Ratio
Cash flow ratio is the tool which can be used to compare an enterprise’s market value to its own cash flow.
Calculation Method
Divide the company’s market capital by the company’s operating cash flow in the recent financial year.
The another method to calculate the cash flow ratio is by dividing per share stock price by per share operating cash flow.
Remember the lower is the value, the better is the company.
Current Liability Coverage Ratio
This ratio gives the clear picture of how well a company manages it’s debts.
Calculation Method
Divide the total cash flow from operations from current liabilities of the company.
The higher the magnitude of the ratio the better it is. Check that the ratio should not fall below 1.
Asset Efficiency Ratio
The magnitude of this ratio shows how the assets are utilised by an enterprise. We can use this ratio to compare between different competitor companies.
Calculation Method
Divide cash flow from operations by total assets of the enterprise.
The ratio should always be a positive number and the greater it is the better the company is utilising its assets.
Long Term Debt Coverage Ratio
With this ratio you can immediately sense whether the enterprise can pay off its debt or not.
Calculation Method
Divide operation cash flow from long term debt.
The higher the magnitude of the ratio, the more cash the company is paying off as debt.
External Financing Index Ratio
As the name suggets, this ratio dipicts how much a company is dependent on the external finanacing.
Calculation Method
Divide the cash from financing from cash flow from operations.
The higher the magnitude of the ratio, the more the company depends on external money.
The strong companies have negative ratios.
Summary
| Cash Flow Ratios | Preferred Values |
| Operating Cash Flow Ratio | Should be greater than 1 |
| Current Ratio | Value greater than 1 |
| Cash/Price Flow Ratio | Lower values are Better (Good for comparision to select from a sector) |
| Cash Flow Margin Ratio | Larger values are Better (Good for comparision to select from a sector) |
| Current Liability Coverage Ratio | Should not be Less than 1
Higher values are good |
| Asset Efficiency Ratio | Should be always positive Higher values are good |
| Long Term Debt Coverage Ratio | The higher the magnitude of the ratio, the more cash the company is paying off as debt. |
| External Financing Index Ratio | Good companies have negative ratios. |
Conclusion:
The cash flow ratios are used by financial planners, auditors and accountants for financial analysis and planning. As you can conclude from my article that the magnitude and unexpected fluctuation in the ratios gives an insight of the financial state of an enterprise and can save the investors from fraud and financial loss.
