Operating Cash Flow Ratio

What Is Operating Cash Flow Ratio?

The Operating Cash Flow Ratio, often known as the liquidity ratio, is a measure of a company's ability to pay down current liabilities using cash flow generated by its main business operations. This financial indicator depicts how much money a business makes from its operations per dollar of current liabilities. The operating cash flow ratio is a useful indicator of a company's short-term liquidity because earnings include accruals and can be manipulated by management. Individuals must determine the cash flow resulting from the core business operation in order to calculate this ratio. The same is usually shown in the company's cash flow statement. On the other hand, going through a balance sheet might quickly reveal a company's existing obligation.


Formula:

Cash Flow Ratio

Interpretation:

  • The operating cash flow ratio is a liquidity ratio that assesses a company's ability to pay down current liabilities with cash generated from its core operations.

  • Because it only employs cash earned from core company operations rather than all income streams, this liquidity ratio is regarded a reliable measure of short-term liquidity.

  • A ratio of less than one suggests short-term cash flow concerns; a ratio of more than one indicates good financial health, as it implies cash flow that is more than adequate to pay short-term financial obligations.

Where do we find the information for this ratio

Current Liabilities: Balance Sheet

Cash Flow From Operation: Cash Flow Statement


Operating Cash Flow Ratio vs. the Current Ratio

The current ratio and the operating cash flow ratio both evaluate a company's capacity to pay short-term debts and obligations.

The operating cash flow ratio assumes that current commitments will be paid with cash flow from activities (i.e., current liabilities). Meanwhile, the current ratio anticipates that current assets will be used.



Pros And Cons:

Pros-

  • The Operation Cash Flow ratio is a useful indicator of a company's liquidity or ability to pay down short-term debt.

  • It aids in determining the earnings generated by the company's principal business operations.

  • This ratio is useful for business analysts and potential investors since it allows them to compare organizations with similar operational activity.

  • Companies prefer operating cash flow to net income in general because there is less flexibility to adjust or influence the result.

Cons-

  • This ratio can be easily manipulated by firm.

  • Companies should utilize this ratio in analysis with other ratios to conduct a thorough financial analysis.

  • A low OCF ratio may not always imply a company's financial health. As a result, potential investors and analysts must be extra cautious while examining this ratio, as well as the company's overall debt management capability.

Example

Q)Current Assets - 134,836,000

Current Liabilities - 125,481,000

CFO- 104,038,000

CFF- (93,353,000)

CFI- (14,545,000)


Solution:

OCF Ratio = Cash flow from operation / Current liabilities

= 104,038,000/125,481,000

=0.83


CFO Ratio Example