Calculation of the main Cash flow ratios relates strongly to their target use. The performed calculations allow to find quickly the appropriate metric that is needed for the correct analysis and decision-making process.
Cash Flow Ratios
Covering Revenue and Profit Cash Flow Ratios
These figures make it possible to determine the level of deviation between revenue or profit and cash flows. They also provide an opportunity to obtain information on the so-called quality of income or profit. That is, they describe the extent to which revenue and profit correspond to the real cash inflows. International experts use various formulas to calculate these indicators. In general, the indicators are quite subjective and each analyst introduces his own corrections to the methodology of calculations.
- 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
Covering Capital Expenditures and Dividends Cash Flow Ratios
Capital Expenditures Cash Сoverage Ratio assesses the company’s ability to finance its own investments in the development and improvement of production. Dividend Coverage Ratio shows the company’s ability to pay dividends. These metrics also indicate the enterprise is able to finance its activity without attracting additional resources like bank loans or funds from investors. Generally, the indicators show the possibility of implementing an investment policy of the company. At the same time, if the company still has available funds after covering capital expenditures and dividends, it is a sign of a positive free cash flow. This means the company has good prospects for future. Such enterprises are very attractive for investing.
- Capital Expenditure Ratio
- Investment Income Ratio
- Financial Income Ratio
- Cash Dividend Coverage Ratio
- Capital Expenditures & Cash Dividends Coverage Ratio
Debt Coverage Cash Flow Ratios
The indicators of this group measure the company’s solvency and its ability to repay interest and debts, expand its activities and reduce the dependence on bank loans. Analysis of these indicators provides information on the financial situation of the enterprise, its possible financial risks and sustainability of activity.
For calculation purposes, the cash flows figures can be taken either from the company’s financial statements or analytical managerial reports. Debt Coverage Indicators are frequently used by investors, credit organizations and other institutions involved in financing various businesses. The goal is to assess the future creditworthiness of the enterprise and predict its financial sustainability.
- Cash / Debt Coverage Ratio
- Short-Term Debt Coverage Ratio (STDCR)
- Cash Flow to Long-Term Liabilities Ratio
- Cash Maturity Coverage Ratio
- Cash Interest Coverage Ratio
- Cash / Debt Service Coverage Ratio
- Cash Total Liabilities Coverage Ratio
- Years Total Debt Ratio
- Years Current Liabilities Debt Ratio
Cash Return Indicators
These figures are used to analyze the enterprise’s ability to generate cash flow. Cash Return on Equity as well as Cash Return on Assets are the most commonly used ratios of this group. These indicators should be calculated based on the cash flow from operating activity. Since there is a large number of enterprises with different types of activities, it is possible to adjust the operating cash flow for different indicators. Cash Return on Investments is another quite large and important set of metrics being calculated as coefficients or percentage figures. Traditionally, a higher value of the indicator alongside its positive dynamics is preferable for all indicators of cash return.
- Cash Flow Return on Assets Ratio
- Cash Return on Gross Assets Ratio
- Cash Return on Equity Ratio
- Cash Flow Return on Investment Ratio
- Cash Return On Capital Invested Ratio
- Cash Return on Inflation Adjusted Gross Investment Ratio
- Cash Return On Invested Capital Ratio
Cash Flow Reinvestment Rate and Cash Flow Adequacy Ratio
These indicators show whether there is enough cash to finance main activity after all major investment programs are implemented. Free cash flow is often used as the basis for calculations. However, it is also possible to use both operating and net cash flow in practice. Investors use the above mentioned metrics to assess the investment attractiveness of the enterprise.