Indicator of operating cash flow to net income (CFО/NI) describes the monetary amount of the financial result. It often happens in practice an enterprise receives profits, but has no money. This figure may show the reason for this situation.
Alternative names of the cash cover net income:
• Operating Cash Flow to Net Income
• Cash Cover Net Profit
• Cash Cover Net Income.
What Does the Indicator of CFО/NI Show?
The indicator reflects the ratio of operating cash flow to the net profit. It allows to assess how good the net profit is, i.e. the real money in it. The most correct way in determining this indicator is to use the operating cash flow adjusted for the amount of depreciation. However, many experts do not adjust the net operating cash flow for depreciation.
Formula of the CFО/NI
CFO / NI = (Operating cash flow – Depreciation) / Net profit
CFO / NI = Operating cash flow / Net profit
Normative Value of CFО/NI
If the indicator’s value is higher than 1, it means the company is able to finance its performance at the expense of the operating activity. Higher figures indicate the company’s profit is of higher quality.
Quick Sales Ratio is the analog of the above mentioned indicators.