Ratio Analysis: Cash Flow Efficiency Ratios

The vein of an organization is the cash flow. In earlier article, we understand that cash flow statement is an integral part of the financial statements.

We can derive useful ratios the cash flow statement so as to assist us to evaluate the cash sufficiency of the entity. When we say cash sufficiency of an entity, we basically mean the adequacy of the cash flows to meet the entity’s cash needs for long-term debt payments, dividends and acquisition of non-current assets.

However, we should not be confused with cash flow efficiency of the entity which is really the efficiency with which the entity generates cash from its revenues, profits and assets.

Let’s look at the ratios for Cash flow namely :

 

• Cash Sufficiency and
• Cash flow Efficiency:

 

Ratios For Cash flow efficiency

(a) Cash flow to sales

Purpose: to measure the ability to convert sales revenue into cash flows. Formula: Cash from operations Net sales revenue

(b) Operation Index

Purpose: an index measuring the relationship between profit from operations and operating cash flows Formula: Cash from operations Operating profit after income tax

(c ) Cash flow return on assets

Purpose: to measure the entity’s operating cash flow return on assets before interest and tax. Formula: Cash from operations + Tax Paid + Interest paid Average total assets