How do financial analysts use cash flow ratios Provide an ex

How do financial analysts use cash flow ratios? Provide an example

Solution

Cash Flow ratios are very important measure to understand how much cash flow the business in generating per dollar value of sales or per dollar value of assets employed. Mainly Operating Cash flows per $ of sales or per $ of assets is calculated. The financial analysts can compare the ratio of a company with industry or segment benchmark or year to year analysis for judging the performance of a company.

On the other hand the Cash flow from operating activities can be compared against total cash flow to judge how much of the total cash flow is contributed by Operating activities. Higher the ratio , better is the perofrmance.

One example is the the Operating Cash Flow ratio which is = Cash Flow from Operating Activities/Sales.

This is an excellent measure of the actual cash flow performance of the company as it shows the actual cash generated by the operations per dollar of sales revenue. This is a good peroformance measure from the investors and creditirs point of view as it deals with the actual cash flow is cash method against the sales recorded in accrual concept.