Cash Cover Operating Margin shows the amount of real money the operating profit calculated by the accounting method contains. The indicator is used to assess the quality of profit.
Alternative name of Cash Cover Operating Margin:
- Operating Cash Flow to Operating Profit.
What Does Cash Cover Operating Margin Show?
Operating profit shows the result from the operating activity. It is determined in the form of profit received in the tax period. Operating cash flow shows net cash inflows that actually occurred during the explored period.
Depreciation costs influence the operating income but have no effect on operating cash flows. An enterprise may enjoy a high operating cash flow at the expense of depreciation costs, but have a low operating profit at the same time.
Formula of Cash Cover Operating Margin
The indicator is calculated as a percentage ratio of operating cash flow to the operating profit. The coefficient is defined as follows:
CFO / OP = Operating cash flow / (Operating profit + Depreciation) * 100%
Since depreciation represents non-cash costs, it attributes to the operating profit during the calculations.
Normative Value of the Cash Cover Operating Margin
As a rule, operating cash flow is higher than the sum of profit and depreciation. The cash flow includes advances that do not refer to the operating income. If an enterprise deals with advances, the indicator may have a high positive value.
If the indicator’s value is less than 1, this shows the quality of operating profit is understated. The company needs to ensure that its financial performance does not differ substantially from the actual one.
- Operating Cash Flow Margin Ratio
- Operating Cash Flow to Operating Profit Ratio
- CFО / EBITDA Ratio
- Operating Cash Flow to Net Income Ratio
- Quick Sales Ratio (QSR)
- Quick Income Ratio
- Cash and Cash Equivalents & Current Financial Investments to Revenue Ratio