Cash Flow Indicator Ratios

Cash Flow Coverage Ratio

The cash flow coverage ratio is an indicator of the ability of a company to pay interest and principal amounts when they become due. This ratio tells the number of times the financial obligations of a company are covered by its earnings. A ratio equal to one or more than one means that the company is in good financial health and it can meet its financial obligations through the cash generated by operating activities. A ratio of less than one is an indicator of bankruptcy of the company within two years if it fails to improve its financial position.

Cash Flow Management

Analyzing and managing the cash flows of a company is known as cash flow management. Cash flow on the other hand is an accounting statement. It shows the amount of cash a company has generated over a certain time period. Cash flow can be calculated monthly, semi – annually, quarterly and yearly. It helps a firm to analyses its financial strength.

Cash Flow Return on Investment (CFROI)

Cash flow return on investment (CFROI) is the indicator that helps a firm to evaluate the performance of an investment or product. It can also be termed as the calculation that helps the stock market to set prices on the basis of cash flow.

Free Cash Flows / Operating Cash Flows Ratio

This ratio compares the free cash flows (FCF) to the operating cash flows (OCF). The more free cash flows are embedded in the operating cash flows of a company, the better it is. Higher free cash flows to operating cash flows ratio is a very good indicator of financial health of a company.

Operating Cash flow / Sales Ratio

This ratio compares the operating cash flows a company to its sales revenue. This ratio gives the analysts and investors indications about the ability of a company to generate cash from its sales. In other words, it shows the ability of a company to turn its sales into cash. It is expressed as a percentage.

Price/Cash Flow Ratio

Price/cash flow ratio is an investment valuation ratio used by investors to evaluate the attractiveness of investing in a company’s shares. This ratio considers cash flows only and removes the effect of non cash items like depreciation. It is calculated by dividing market value of a company’s share to operating cash flow that company generates per share.

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