What do cash flow ratios mean?

The operating cash flow ratio is a measure of the number of times a company can pay off current debts with cash generated within the same period. A high number, greater than one, indicates that a company has generated more cash in a period than what is needed to pay off its current liabilities.

What is a good cashflow ratio?

Ideally, the ratio should be fairly close to 1:1. A much smaller ratio indicates that a business is deriving much of its cash flow from sources other than its core operating capabilities.

What is cash flow ratio formula?

You just need to understand the formula, which is as follows: Operating Cash Flow Ratio = Cash Flow from Operations / Current Liabilities. In this formula, “Cash Flow from Operations” refers to the amount of money your business generates from ongoing business activities.

Why are cash flow ratios important?

Cash flow ratios compare cash flows to other elements of an entity’s financial statements. A higher level of cash flow indicates a better ability to withstand declines in operating performance, as well as a better ability to pay dividends to investors.

What are ratios used for?

Ratios measure the relationship between two or more components of financial statements. They are used most effectively when results over several periods are compared. This allows you to follow your company’s performance over time and uncover signs of trouble.

What is a good cash flow per share number?

Also like a P/E ratio, the lower the number, the better. Currently, the average Price to Cash Flow (P/CF) for the stocks in the S&P 500 is 14.05. But just like the P/E ratio, a value of less than 15 to 20 is generally considered good.

Which cash flow ratio is most important?

A higher ratio – greater than 1.0 – is preferred by investors, creditors, and analysts, as it means a company can cover its current short-term liabilities and still have earnings left over. Companies with a high or uptrending operating cash flow are generally considered to be in good financial health.

How do you calculate CFO and Pat?

This ratio is otherwise known as quality of earnings ratio. It is computed by dividing CFO by Profit After Tax (PAT or Net Income) of a firm. If CFO exceeds the net income, then it is considered the firm can convert its accounting (accrual) earnings into cash.

How do you audit cash flow?

How to Audit a Cash Flow Statement

1 Verify disclosures in the Cash Flow Statement and Notes to Accounts as per below Checklist.
2 First read the post on Cash Flow Statement.
3 Also, refer to the PPT on Cash Flow Statement.
4 Read the FAQ’s on Preparation and presentation of Cash Flow Statement as per Ind AS 7.