Everything You Need to Know About Cash Flow Ratio Analysis

What is Cash Flow?

Cash Flow indicates the amount of revenue stream that has been added to the entity's cash account. Cash flow determines the business's financial strength and is the driving force behind the firm's operations. Cash flow is driven by operating activities, financing activities, and investing activities. A cash flow statement of a company encompasses all information of the cash used and generated by a company at any given time. Cash flow attributes are specific to projects and businesses as a whole, and it is an indication of any company's prosperity.

Importance of Cash Flows

Cash Flows are essential to solvency as they display past records and future anticipation of the company's performance. Cash flow is a crucial element of any firm's survival as it requires an ample amount of cash as insurance for timely payment for creditors, employees, and other expenses. The cash flow statements help analysts look into the financial status of the company. A business can look prosperous due to the non-cash payments or credits, but in reality, they may be close to solvency or bankruptcy based on their cash inflows. Having ample cash in hand helps the company to invest in better projects to generate higher revenues.

What is Cash Flow Ratio?

Cash flow ratio is a financial metric that measures a company's ability to pay off its short-term liabilities using its operating cash flow. It is calculated by dividing operating cash flow by current liabilities. This ratio helps assess a company's liquidity by determining how efficiently it can meet its debt obligations with the cash generated from its core operations. A higher cash flow ratio indicates stronger financial health, as it shows the company can cover its liabilities with its available cash flow.

Cash Flow Coverage Ratio

Cash flow coverage ratio is a financial metric that assesses a company's ability to cover its debt obligations, including both interest payments and principal repayments, using the cash flow generated from its operations. It is calculated by dividing the operating cash flow by the total debt, including both short-term and long-term liabilities. A higher cash flow coverage ratio indicates that a company has sufficient cash flow to comfortably meet its debt obligations, signaling strong financial stability. Conversely, a lower ratio may indicate potential challenges in meeting debt payments.

Cash Flow Coverage Ratio = (Earnings Before Interest and Taxes + Non-Cash Expenses) ÷ Interest Expense

Current Liability Coverage Ratio/Current Cash Debt Ratio

The current cash debt ratio is a measure of overall cash from operating activities to average current liabilities. This ratio demonstrates the ability of the company's running operation to generate enough revenues that it can pay the debt in a year.

Current cash debt ratio = net cash provided by operating activities / average current liabilities

Price to Cash Flow Ratio

The price to cash flow indicator ratio is a multiple stock valuation that measures the value of a company's stock price relative to its operating cash flow per share. The price to cash flow ratio is a more reliable investment valuation indicator than the price to earnings ratio, as it measures the company's cash relative to its stock market, which is less likely to depreciate.

Price to Cash Flow Ratio = Price per Share / Operating Cash Flow per Share

OR

Price to Cash Flow Ratio = Market Capitalization / Operating Cash Flow

Cash Flow to Net Income

Cash flow to income ratio is the indicator of the overall monetary amount of profits that a company gains. The ratio reflects the operating cash flow adjusted by the amount of depreciation to the net flow of income.

Cash Flow to Net Income = Operating Cash Flow / Operating Income

Cash Flow Margin Ratio/Cash Returns on Sale

Operating cash flow is an appraisal of the company's ability to generate cash from its sales. This indicator is used in determining the profitability and estimating the efficiency of obtaining cash from the sales.

Cash Flow Margin Ratio = Operating Cash Flow / Total Sales

Cash flow ratio analysis is a vital tool for assessing a company's financial health and its ability to meet short-term and long-term obligations. By evaluating various cash flow ratios such as the cash flow coverage ratio, current liability coverage ratio, and price to cash flow ratio, investors and analysts can gain valuable insights into a company's liquidity, solvency, and overall performance. For businesses looking to dive deeper into their cash flow metrics, utilizing the Financial Ratios API from FMP allows for seamless access to real-time data on critical financial ratios, including cash flow ratios, empowering more informed decision-making.