Cash flow ratios are one of the most reliable ratios. Cash is king and it is the life force for everything. A company that can generate better cash flows will have the capacity to withstand cyclicality and other business challenges. In terms of liquidity analysis, cash flow ratios are more reliable. If a business is not able to generate cash, then it is most likely to shut shop in future. Cash flow ratios use cash flows and other elements from the balance sheet and profit and loss account. Let us examine a few cash flow ratios
(Cash flow from operations (CFO) /sales) X 100
Mar-19 | Mar-20 | Mar-21 | |
Cash from operations | 4 | 10 | 25 |
Net sales | 271 | 264 | 228 |
Operating cash flow ratio | 1% | 4% | 11% |
Industry leader | 12% | 17% | 17% |
Interpretation: The company has improved its cash flow from operations in the last two years. The operating cash flow ratio has improved from 1% in March-19 to 11% in March-21.
Cash flow from operations (CFO) /interest paid
Mar-19 | Mar-20 | Mar-21 | |
Cash from operations | 4 | 10 | 25 |
Interest | 7 | 7 | 5 |
Cash flow interest coverage ratio | 0.57 | 1.43 | 5.00 |
Industry leader | 5.66 | 10.26 | 28.54 |
Interpretation: The company has improved its cash flow for interest coverage in the last two years. The cash flow interest coverage ratio has improved from 0.57 in March-19 to 5 in March-21. If you compare this with the interest coverage ratio, this ratio gives a better picture.
Cash flow from operations (CFO) /total assets
Mar-19 | Mar-20 | Mar-21 | |
Cash from operations | 4 | 10 | 25 |
Total assets | 203 | 18.48 | 13.68 |
Cash flow asset efficiency ratio | 0.02 | 0.54 | 1.83 |
Industry leader | 0.15 | 2.83 | 3.01 |
Interpretation: Improvement can be seen in the asset utilisation in the last two years. This means more cash is generated for every rupee of asset employed.
(Cash flow from operations CFO – dividends paid) / long term debt
Mar-19 | Mar-20 | Mar-21 | |
Cash from operations | 4 | 10 | 25 |
Less: Dividends | 0 | 0 | 0 |
Cash flow after dividends (a) | 4 | 10 | 25 |
Long term debt (b) | 62 | 58 | 64 |
Cash flow long term debt coverage (a)/(b) | 0.06 | 0.17 | 0.39 |
Industry leader | 0.50 | 1.36 | 2.23 |
Interpretation: Improvement can be seen in this ratio as well. From 0.06 in March-19 this ratio has improved to 0.39 times. The industry leader is way ahead in this regard.
Cash flow from operations (CFO) / (CFO + inflow from investing + inflow from financing)
Mar-19 | Mar-20 | Mar-21 | |
Cash from operations (a) | 4 | 10 | 25 |
Cash flow from investing activities (b) | -3 | 0 | -9 |
Cash flow from financing activities (c) | -2 | -14 | -7 |
Total cash flow (a)+(b)+(c) | -1 | -4 | 9 |
Cash flow from operations to total cash flow (a)/[(a)+(b)+(c)] | -4.00 | -2.50 | 2.78 |
Industry leader | 88.67 | -200.00 | 74.20 |
Interpretation: This ratio indicates that the operating cash flow is almost 2.78 times the total cash flow. The cash flow from operations is used for investing and financing activities while leaving behind some cash in hand.
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