Financial Statement Analysis

- Ratio Analysis of Financial Statements (Formula, Types, Excel)
- Ratio Analysis Advantages
- Ratio Analysis
- Liquidity Ratios
- Cash Ratio
- Cash Ratio Formula
- Quick Ratio
- Quick Ratio Formula
- Current Ratio
- Current Ratio Formula
- Acid Test Ratio Formula
- Defensive Interval Ratio
- Working Capital Ratio
- Working Capital Formula
- Net Working Capital Formula
- Changes in Net Working Capital
- Cash Flow from Operations Ratio
- Cash Reserve Ratio
- Operating Cycle Formula
- Current Ratio vs Quick Ratio
- Bid Ask Spread
- Liquidity vs Solvency
- Liquidity
- Solvency
- Solvency Ratios
- Equity Ratio
- Capital Adequacy Ratio
- Liquidity Risk
- Altman Z Score

- Turnover Ratios
- Inventory Turnover Ratio
- Accounts Receivable Turnover
- Accounts Receivables Turnover Ratio
- Accounts Payable Turnover Ratio
- Days Inventory Outstanding
- Days in Inventory
- Days Sales Outstanding
- Average Collection Period
- Days Payable Outstanding
- Cash Conversion Cycle
- Cash Conversion Cycle (CCC) Formula
- Fixed Asset Turnover Ratio Formula
- Debtor Days Formula
- Working Capital Turnover Ratio

- Profitability Ratios
- Profitability Ratios Formula
- Common Size Income Statement
- Vertical Analysis of Income Statement
- Profit Margin
- Gross Profit Margin Formula
- Gross Profit Percentage
- Operating Profit Margin Formula
- EBIT Margin Formula
- Operating Income Formula
- Net Profit Margin Formula
- EBIDTA Margin
- Degree of Operating Leverage Formula (DOL)
- NOPAT Formula
- OIBDA
- Earnings Per Share
- Basic EPS
- Diluted EPS
- Basic EPS vs Diluted EPS
- Return on Equity (ROE)
- Return on Capital Employed (ROCE)
- Return on Invested Capital (ROIC)
- Return on Sales
- ROIC Formula (Return on Invested Capital)
- Return on Investment Formula (ROI)
- ROIC vs ROCE
- ROE vs ROA
- CFROI
- Cash on Cash Return
- Return on Total Assets (ROA)
- Return on Average Capital Employed
- Capital employed Employed
- Return on Average Assets (ROAA)
- Return on Average Equity (ROAE)
- Return on Assets Formula
- Return on Equity Formula
- DuPont Formula
- Net Interest Margin Formula
- Earnings Per Share Formula
- Diluted EPS Formula
- Contribution Margin Formula
- Unit Contribution Margin
- Revenue Per Employee Ratio
- Operating Leverage
- EBIT vs EBITDA
- EBITDAR
- Capital Gains Yield
- Tax Equivalent Yield
- LTM Revenue
- Operating Expense Ratio Formula
- Overhead Ratio Formula
- Variable Costing Formula
- Capitalization Rate
- Cap Rate Formula
- Comparative Income Statement
- Capacity Utilization Rate Formula
- Total Expense Ratio Formula

- Efficiency Ratios
- Dividend Ratios
- Debt Ratios
- Debt to Equity Ratio
- Debt Coverage Ratio
- Debt Ratio
- Debt to Asset Ratio Formula
- Coverage Ratio
- Coverage Ratio Formula
- Debt to Income Ratio Formula (DTI)
- Capital Gearing Ratio
- Capitalization Ratio
- Interest Coverage Ratio
- Times Interest Earned Ratio
- Debt Service Coverage Ratio (DSCR)
- DSCR Formula (Debt service coverage ratio)
- Financial Leverage Ratio
- Financial Leverage Formula
- Degree of Financial Leverage Formula
- Net Debt Formula
- Leverage Ratios
- Leverage Ratios Formula
- Operating Leverage vs Financial Leverage
- Current Yield
- Debt Yield Ratio
- Solvency Ratio Formula

## What is Cash Flow from Operations Ratio?

Cash flow from operations ratio helps in identifying how exactly the cash generated from the core day to day business activities of the firm is affecting the financials of the firm.

Following are the top 4 operating cash flow ratios that help in evaluating the financial condition of the firm. Let’s go through them one by one.

### #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**

- Enterprise value in simple terms is the current market value of the firm. It identifies the opportunity cost of the business at the current point of time. It is the sum of all assets and liabilities that the firm is entitled to. It’s a very dynamic value and can vary a lot with time.
- It is often confused with the market capitalization of listed companies which only reflects the value of common equity. Because of the comprehensive worth that it provides, enterprise value is often the replacement for total Enterprise value.
- Cash flow from operations includes cash from primary business operations of the company.

#### Interpretation of this Operating Cash Flow Ratio

- 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.
- This metric is very helpful for investors comparing firms operating in a similar business. Lower the ratio, more attractive is the firm for investment.

#### Example of Ev to CFO Formula

Let’s consider a firm with the following financials.

Using the above numbers lets 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 of this Operating Cash Flow Ratio

- Cash returns on asset ratio is an important metric in capital intensive firms. It helps in evaluating the financial condition of the firm which large investments in assets like setting up manufacturing plants and workshops, buying raw materials as these large investments, owing to the large value per transaction, can alter the financial statements to a great extent.
- It is an important metric to identify the investment opportunity and comparing firms operating in similar business. In general, a higher ratio is better when analyzing the capital intensive firms like automakers or real estate firms.
- Last but the most important attribute of this metric is that it helps in identifying how efficiently the firm is employing its assets. A higher value may convince the investors that the firm has good operational efficiency and may continue to grow at a good pace eventually giving better returns to its shareholders.

#### Example of Cash Returns on Asset Ratio

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

4.8 (388 ratings)

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**

- Total debt calculated from the balance sheet

#### Interpretation of this Operating Cash Flow Ratio

- Although fairly unrealistic and impractical for the management of a firm to use all its operating cash flows to repay the outstanding debt, cash flow to debt ratio provides a very important metric in analyzing the financial status of the firm. It provides a snapshot of how much time a firm will take in repay all its debt using its operating activities. Hence providing an important instrument in identifying the return on investment for both shareholders and other firms looking to acquire it.
- In addition to identifying the growth opportunities, it also helps the investors in identifying if the firm is highly leveraged or not. This measure can be helpful for risk-averse investors in making investment decisions

#### Example of Cash Flow to Debt Ratio

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

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.

Capital Expenditure 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 of this Operating Cash Flow Ratio

- Capital expenditure ratio is an important 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 important 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 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 Article

This 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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