This article contains 7 best cash flow ratios with its Formula.
These will help you to understand your business’s financial ability and help to improve better results.
So, don’t waste time and start from the basics.
What is cash flow ratio
Cash flow ratio is a mathematical equation of some financial metrics. Those equations give information regarding firms liquidity and solvency analysis.
In simple words, CF ratio compares two or more financial values.
For calculating cash flow ratio we need data of these matrix which are used and those are found in the cash flow statement.
Note that, balance sheet and income statement also have ratios but those are not helpful as CF ratios used.
Types of cash flow ratios
Different types of ratios indicate different positions of a company and by this we can get a conclusion as to how we need to modify our business.
Here we will know 7 special ratios. So let’s understand the first one.
Operating cash flow ratio
This ratio is calculated as comparing cash flow from operation by current liabilities. It indicates the company’s liquidity to pay off current liabilities.
Formula:
Operating cash flow ratio = cash flow from operation ÷ current liabilities
If this ratio value come less than one means company can’t capable to pay it’s current liabilities and need to improve operating cash. Other side, equal to one or more than one is good Sign of company.
By the way, this cash flow from operations does not include dividend payment.
Price to cash flow ratio
P/CF ratio measures how profitable a company’s share is. This ratio compares price of share with operating cash flow per share.
In Other words, company capital value is compared with its operating cash flow. Which shows the value of shares according to current cash flow.
Formula:
P/CF ratio = price of share ÷ operating cash flow per share
OR
P/CF ratio = capital value ÷ operating cash flow
Both formulas are the same in terms of calculating data. Lower rate is considered ideal cause it means firms share value is low and it will be increase in the future.
On the other side, higher value indicates overvalue of the company or investors willing to pay a high price for shares.
Price to cash flow ratio is also better than price to earning ratio because it includes data from income statement and that can be manipulated by accounting method.
cash flow coverage ratio
Cash flow coverage ratio is one of the best ways to know a company is capable of paying its all debt. This ratio is calculated as dividing operating cash flow by its total debt.
Formula:
Cash flow coverage ratio = operating cash flow ÷ total debt
This ratio also considers long term effects rather than indicating current situation. Numbers of that value says how many times a company pays out its interest and principal amount.
If the number is more than one then no problem, but less than one is signed to Company cash flow that can’t match with debt and needs to improve.
Cash generating power ratio
Personally, talking about this ratio because I love its name.
Cash generating power ratio compares different cash inflows for calculating. It defines cash inflow from operating division by full cash inflow.
Formula:
CGP ratio = operating cash inflow ÷ operating, investing and financial cash inflow.
This cash flow ratio indicates liquidity of the company’s operating section with its full cash flow. And it can be helpful for investors to find out which company is worth it to invest.
Cash flow per share
Cash flow per share is a simple matrix that indicates per share value according to cash flow. when we divide cash flow by every outstanding share then get this ratio.
Formula:
Cash flow per share = cash flow ÷ outstanding shares
Using this ratio investors know to will it share price increase or not, cause after profitability of company theirs share will be the constant but cash flow will affect by profit.
Interest coverage ratio
Cash interest coverage ratio is used just to know if a firm is capable of payout its interest or not.
In other words, using cash flow data we can predict that a company will stand out against its interest in a specific time period.
Its calculation is simple. Divide earning before interest and tax by interest to get the value of this ratio.
Formula:
Cash interest coverage ratio = EBIT ÷ interest
Alternative:
CICR = (OCF + paid taxes + paid interest) ÷ interest
Ideally this cash flow ratio should be more than one, because it concludes that a company is capable of paying its interest and less than one indicates a company not generating enough cash to meet its interest expense. And this can be affect negative in the long term.
Current liability coverage ratio
This ratio indicates the company’s liquidity to cover its liabilities within one year. Current liability coverage ratio is similar to some others, just a little different. Calculate that we need to compare OCF by liabilities of the current year.
Formula:
Current liability coverage ratio = (operating cash flow – dividend payment) ÷ current liability
This ratio also shows the stability of the company. Example for if ratio value is 2 means firms have cash to pay its debt 2 times. On the other hand, when the rate is lower than one indicate the firm goes in a negative way.
We knew some different types of ratios and what it shows. But the question is why CF ratios are much better than other things to analyse financial level.
So let be know.
Why cash flow ratios important
Cash flow ratios are very simple and meaningful. Using them we can get much information regarding our firms.
Such as liquidity and solvency. It’s possible that we can detect any issue which already affects the company for future growth.
Also Easily we can get information of debt and obligations capacity of our company. No matter if it for long term or short term.
Income statement and balance sheet ratios ALSO exist but still these are best for investors and management team to check out firm’s financial health.
Reasons:
1. Cash flow statement show actually cash what company have, where income statement also include revenue and credit sales. It can be less accurate compared to CF statement.
2. Information in cash flow statement is up to date but in any time period, where you can’t find current time information in the balance sheet.
One more advantage of cash flow ratios is you don’t need any professional expert to calculate matris, it’s a very simple trick to get the value of each ratio.
it’s not doubt using those ratios organization can easily find out company’s fault or coming business opportunity.
Conclusion
So it was full information about cash flow ratios.
Now time is your, which ratio you most liked.
Tell me in the comment section and check out these more informational posts.