Cash flow ratios

Cash flow ratios – it is the group of ratios that shows if the company has sufficient cash flow to meet its activities. Activities, for which cash flow ratios are being calculated, are: debt in the company, working capital, investments, liabilities and so on. These ratios show if the cash flow is enough to finance the debt that the company has, or future investments that the company is going to make. Cash flow ratios can be useful in determining the adequacy of cash and cash equivalents as well.

Cash flow ratios are useful for some critical needs. If an investor is interested if the company is good at servicing its debt or long term debt, then “cash flow to total debt” and accordingly “cash flow to long term debt” ratios are very useful. When we calculate “operating cash flow to net income”, we can see which part of net income is supported by operating cash flows, which is calculated by determining net income for non-cash items, such as depreciation.

When calculating cash flow ratios we can see if the company has enough of cash flow to meet its obligations, or if the company is going to suffer from financial distress in the future. Cash flow ratios show if the earnings of the company are in good quality. A higher ratio usually indicates higher earnings quality. These ratios are also good, if we want to check company’s abilities to invest in the future.