Everything You Need to Know About Cash Flow Indicator Ratios

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 are Cash Flow Ratios?

Cash flow ratios are the comparison of the company's cash flows to other aspects of the enterprise's financial statements. These cash flow ratios provide insight into the overall performance of the company. When a company has a higher cash flow ratio, it means the revenues are accelerating, and the entity can pay its bills. Also, it can better withstand the decline in performance at the given time. With the help of these ratios, one can calculate the viability, liquidity, and solvency of the given firm. These ratio indicators help in better evaluation of the company's financial statements. Here are some of the cash flow ratio indicators that are commonly used in the finance world.

Cash Flow Coverage Ratio

Cash flow coverage ratio is an indicator of the liquidity position of a company. The coverage flow ratio manifests the company's ability to pay the debts within the due date. It also showcases the number of times in which its earnings fulfill the financial obligations of a company. The ratio aids banks to decide whether they are generating further loans to the entity or not.

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


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