Cash Flow Analysis

Topics: Generally Accepted Accounting Principles, Cash flow, Operating cash flow Pages: 15 (577 words) Published: March 5, 2015
Accounting analysis of Financial StatementsAnalysis of Statement of Cash Flow

Master of Business Administration
University of Kelaniya

• Cash flow ratios can be categorized as,
 Performance ratios
 Coverage ratios


Performance Ratios

Operating Cash Flow to Sales
Cash Return to Assets
Cash Return on Equity Ratio
Cash flow per share

1. Operating Cash Flow to Sales
• Expressed as a percentage, compares a
company's operating cash flow to its net
sales or revenues.
• Gives investors an idea of the company's
ability to turn sales into cash.
Operating Cash Flow/ Net Sales

2. Cash Return to Assets
Cash return on assets measures management’s
success in generating cash from operating
activities (making operating decisions).
Operating Cash Flow/ Total Assets

3. Cash Return On Equity Ratio
This ratio measures the amount of cash
generated from operations per one rupee of
average shareholders' equity.
Operating Cash Flow/ Total Equity

4. Cash flow per share
• Many analysts and investors place more weight on cash flow per share than earnings per share.
• Because EPS is more easily manipulated, its reliability can at times be questionable. Cash, on the other hand, is difcult to fake.
• Therefore, cash flow per share is a useful measure for the strength of a firm and the sustainability of its business model. Operating Cash Flow/ No. of Shares

Coverage Ratio

Debt coverage ratio
Cash flow interest coverage ratio/Interest coverage Ratio
Reinvestment ratio
Free Cash Flow to Operating Cash Flow Ratio
Cash Flow Adequacy Ratio


1. Debt coverage ratio / CF Coverage Ratio
•The cash flow coverage ratio is an indicator of the ability of a company to pay interest and principal amount.
•This ratio tells the number of times the financial
obligations of a company are covered by its earnings.
• It is an important indicator of the liquidity position of a company.
 Cash Flow Coverage Ratio = Operating Cash Flows /
Total Debt

2. Interest Coverage Ratio
This ratio is a better measure than the
traditional interest coverage to indicate risk of
default on interest payments, because the
ratio represent the cash flow figure rather
than an accrual based figure. Can be
Calculated as,
(Cash generated from operations + Interest Paid
+ Tax Paid) / Interest Expenses

3. Reinvestment Ratio
The reinvestment ratio is used to estimate the
amount of cash flow that management
reinvests in a business. 
Can be calculated as,
(Fixed Assets Purchased + Cost incurred for
Working Capital) / Operating Cash Flow

4. Free Cash Flow to Operating Cash Flow
The free cash flow to operating cash flow ratio
measures the relationship between free cash
flow and operating cash flow. 
Can be Calculated as follows.
Free Cash Flow/ Operating Cash Flow

Free Cash Flow
Free Cash Flow
The idea is to provide a measure of what is
available to the owners of firm after providing
for capital expenditure to maintain the existing
assets and to create new assets for the future
Can be Calculated as,
Operating Cash Flow – Capital Expenditure

5. Cash Flow Adequacy Ratio
Measures company’s ability to cover capital
expenditure, long term debt payments and
cash dividend payments.
Cash flow adequacy is computed as:
Cash flows from operations / (fixed assets
purchased + long-term debt paid + cash
dividends distributed)

Self Study
Creditors and lenders began using cash flow
ratios because those ratios give more
information about a company's ability to meet
its payment commitments than traditional
balance sheet working capital ratios.

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