Cash Flow from Operations Ratio

What is Cash Flow from Operations Ratio?

Cash Flow from Operations Ratio is the ratio that helps in measuring the adequacy of the cash which are generated by the operating activities that can cover its current liabilities and it is calculated by dividing the cash flows from the operations of the company with its total current liabilities.

Cash-Flow-from-Operations-Ratio

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For eg:
Source: Cash Flow from Operations Ratio (wallstreetmojo.com)

 #1 – CFO Enterprise Multiple

EV to CFO Formula is represented as follows,

EV to CFO = Enterprise Value / Cash Flow from Operations

Another more popular and precise formula:

EV/CFO = (Market Capitalization + Debt Outstanding – Available Cash with the Firm) / Cash Flow from Operations

Interpretation

  1. CFO enterprise multiple helps in calculating the number of years the firm will take to buy its entire business using the cash flow generated from the core business activities of the firm. In simple terms, how much time the firm will take to repay all debt and other liabilities by using the operations cash flow without putting any restraint on the assets of the firm. This analysis is helpful in mergers and acquisitions.
  2. This metric is very helpful for investors comparing firms operating in a similar business. The lower the ratio, the more attractive is the firm for investment.

Example of Ev to CFO Formula

Let’s consider a firm with the following financials.

CFO Formula Example

Using the above numbers, let’s calculate CFO enterprise multiple using the above equations

((10,000,000 * 50) + 500,000 – 300,000) / 50,000,000

EV/CFO = 10.004

 #2 – Cash Returns on Asset Ratio

Cash Returns on Asset Formula is represented as follows,

Cash returns on Assets = Cash Flow from Operations / Total Assets
  • Total Assets includes all assets and not just limited to the fixed assets and can be calculated directly from the balance sheet.

Interpretation

Example of Cash Returns on Asset Ratio

Let’s consider the example of an automaker with the following financials.

Cash Returns on Asset Example

Cash returns on assets = cash flow from operations/ Total assets

= 500,000 $/ 100,000 $

Cash Returns on Asset Ratio = 5

This means that the automaker generates a cash flow of 5$ on every 1$ of assets that it has. Comparing it with other automakers in the economy, an investor can identify how are the growth prospects of the firm.

 #3 – Cash Flow to Debt Ratio

Cash Flow to Debt Ratio Formula is represented as follows,

Cash Flow to Debt Ratio = Cash Flow from Operations / Total Outstanding Debt

Interpretation

Example of Cash Flow to Debt Ratio

Let’s continue with our previous example of the automaker with the following financials.

Cash Flow to Debt Ratio Example

Using the above formula, cash flow to debt ratio = 500,000/2,000,000

Cash Flow to Debt Ratio = .25 or 25%

 #4 – Capital Expenditure Ratio

Often termed as CF to capex ratio, capital expenditure ratio measures a firm’s ability to buy its long term assets using the cash flow generated from the core activities of the business.

The Capital ExpenditureCapital ExpenditureCapex or Capital Expenditure is the expense of the company's total purchases of assets during a given period determined by adding the net increase in factory, property, equipment, and depreciation expense during a fiscal year.read more Ratio Formula is represented as follows,

Capital Expenditure Ratio = Cash Flow from Operations / Capital Expenditures.
  • Capital spent by management on building long term assets of the firm;

Interpretation

  • The capital expenditure ratio is an essential metric for fundamental analysts as it helps in finding if the firm is undervalued or overvalued. Rather than used as an individual ratio, it is primarily used to compare similar firms in an economy.
  • This metric is also crucial for the management as it helps them in identifying where exactly the cash flows of the firm is going. Knowing this data, management can strategize for the future and devote its attention to evaluate capital intensive projects like setting up a new office or expanding a production facility, launching a new set of products, or restructuring the operational setup.

Recommended Articles

This article has been a guide to Cash Flow from Operations Ratio. Here we discuss the top 4 operating cash flow ratios, including CFO EV Multiple, Cash returns on assets, Cash flow to debt ratio, and more. You may learn more about finance from the following articles –

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