A 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.
A cash flow ratio of less than one indicates the opposite—the firm has not generated enough cash to cover its current liabilities. To investors and analysts, a low ratio could mean that the firm needs more capital.
However, there could be many interpretations, not all of which point to poor financial health. For example, a firm may embark on a project that compromises cash flows temporarily but renders substantial rewards in the future.
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. They are an essential element of any analysis that seeks to understand the liquidity of a business. These ratios are especially important when evaluating companies whose cash flows diverge substantially from their reported profits. Some of the more common cash flow ratios are:
Calculated as cash flow from operations divided by sales. This is a more reliable metric than net profit, since it gives a clear picture of the amount of cash generated per pound of sales.
A proportion close to 1:1 indicates that an organisation is not engaging in any accounting trickery intended to inflate earnings above cash flows.
Calculated as operating cash flows divided by total debt. This ratio should be as high as possible, which indicates that an organisation has sufficient cash flow to pay for scheduled principal and interest payments on its debt.
Calculated as the share price divided by the operating cash flow per share. This ratio is qualitatively better than the price/earnings ratio, since it uses cash flows instead of reported earnings, which is harder for a management team to falsify.
Calculated as cash flows from operations divided by current liabilities. If this ratio is less than 1:1, a business is not generating enough cash to pay for its immediate obligations, and so may be at significant risk of bankruptcy.
Invoice finance allows you to release cash quickly from your unpaid invoices.
As your lender, we can release up to 90% of your invoices within 24 hours. On payment of the invoice from your customers, we will then release the final amount minus any fees and charges. There are different types of invoice financing options available to businesses depending on the situation and the level of control they require in collecting unpaid invoices.
We are an invoice financing company who offer a solution whereby payments are collected on your behalf managed by our team of expert credit controllers so you can focus on running your business. Our Confidential Invoice Discounting solution is offered to businesses who want to maintain their own credit control processes, therefore this remains strictly confidential so your customers are unaware of our involvement.
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