Today, we will discuss operating cash flow ratio and its full information.
In fact we will understand by example too.
So, stop noticing time and let’s start from basic.
What is operating cash flow ratio
Operating cash flow ratio is a matric that indicates company operations capacity to pay off its current debt.
In other words, this indicate how much a company earns revenue from its Business compared to its current liabilities.
This matric is important because it shows the health of the company and future performance.
Investors give priority to operating cash flow rather than net income, because net income can easily be manipulated by accounting tricks..
Also, This indicator helps the company to analyse its Business and cash flow data. Also help to understand is the company is able to gauge its liabilities.
Formula of OCFR
Operating cash flow ratio Formula is as simple as other ratios.
OCFR is found by dividing the value of operating cash flow to current liabilities.
operating cash flow = operating cash flow ÷ current liabilities
Operating cash flow is part of the cash flow statement. Company operating activities and its cash flow including in this section such as sales of goods and service etc.
Another one is liabilities which include debt and obligations in one fiscal year time period.
Example of OCFR
Assume, a company which is named “cash flow click” generates $18 million from operating activities and it has 12 million current debt.
Use the formula to calculate.
OCFR = 18 million ÷ 12 million = 1.5
So cash flow click company operating ratio is 1.5 means it’s earning 1.5 times more compared to its current debt.
If the ratio is higher than one, it means the company is on positive cash flow and able to pay off its short term or current debt.
On the other side, if the operating cash flow ratio is lower than one means company cash flow is negative and the company needs to improve performance or increase its capital. Otherwise it will trap in debt in near future.
But also remember, negative cash flow or lower ratio always does not indicate poor performance, it has happened due to company investing their cash on assets or other things, that’s why company face lower ratio for the short term. But in the long term it will be more beneficial to the company.
Advantages and limitations
Operating cash flow ratio is a proven way to analyse how company operations activities generate cash has capability to pay out current obligations.
It is possible to manipulate cash flow statements and put wrong data in front of you.
Whatever OCFR is still better than net income but more accurate is to use both matrices to avoid some accounting tricks like deducting depreciation expenses from cash flow activities.
Conclusion
So, it’s all information about operating cash flow ratio.
Hope you understood and liked the post.To hu
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