Operating cash flow ratio

Operating cash flow ratio
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Methods and techniques

Operating cash flow ratio it is indicator used in the analysis of the company's financial liquidity.

It is one of the cash flow ratios which extent operational cash flows hedge the repayment of current liabilites. Describes short term liquidity.

If the company loses the ability to pay current liabilities, it will lose liquidity and will have problems with operating continuation. Traditionally information for financial about status of a business was contain from statement of income and statement of financial position. Statement of cash flow gived "supplementary information in undersanding the real operational status of a business [1]."

The formula is:



  • OCF - operating cash flow ratio
  • CFfO - cash flow from operations
  • CL - current liabilities

Cash flow from operations - include those receipts and expenses that are not classified as investing or financing activities.

Current liabilities - total trade payables and other payables that are payable within 12 months.

The operating cash flow ratio shows how many times current liabilities could be paid using cash flow. It should be greater than 1, but the higher the better. All cash flow ratios depending on the industry differ. They are not uniform, but an index smaller than one suggests financial problems of a given enterprise[2].

The loss risk of liquidity[edit]

Ability of a company to pay the short term liabilities (12 months ) measure liquidity. Better liquidity is a faster process of converting assets into cash. Liquidity can be measured using earnings, but those can be subject to manipulation. Therefore, cash flow can be more suitable. Cash flow ratio from operation it is important indicator when testing coverage of current liabilities them cash flow. Lack of liquid assets everytime causes shortages of funds to finance daily activity. When the enterprise can't of timely pay of current liabilities, Operating cash flow ratio be smaller than 1 [3]. Loss of liquidity's finance in the further period it will result in loss of profitability enterprise's.

Usage of operation cash flow ratio[edit]

Basic of financial analisis for stakeholders, whose want to know about the company's ability to continue its business in the future, is analysis is liquidity analisis [4].

  • Cash flow ratios prroviding information to creditors and suppliers
  • Inwestors can testing the financial performance investment
  • Menegers rate competitive positions of rivals
  • Creditors, raiting agency and analittyc used cash flow ratio in analisis risk in investment

Cash flow ratios or traditional financial ratios[edit]

Traditional financial indicators based on information from the balance sheet usually examine only one specific moment. Thus, when the data to be analyzed comes from the moment when current liabilities have a low value compared to other periods, traditional financial indicators based on financial statements are not always able to demonstrate the existing problems of a given enterprise [5].

However, in order to calculate the cash flow from operations, data on the value of cash flows from a given period are needed, as well as the calculation of the average value of current liabilities.

As recalled by R. Kajananthan and T. Velnampy (2014), more reliable data on the financial liquidity analysis can be found in the cash flow statement, however, it is not necessary to completely exclude traditional liquidity ratios. For example, in investment analysis both approaches should be used in order to have wider understanding of the company.

Cash flow ratio[edit]

In addition to the cash flow ratio from operations, there are also [6]:

  • CFO/TL - Cash flow from operatons divided by total liabilities
  • Cash flow interest coverage - Cash flow from operatons+ interest expenses divided by Interest expenses
  • Cash flow margin - Cash flow from operatons divided by total revenue
  • Cash flow to Net income - Cash flow from operatons divided by Net income



  1. Kajananthan R., Velnampy T., 2014, p. 163
  2. Amah K. O., Ekwe M. C., Uzoma I. J., 2016, p. 91
  3. Armen S., 2013, p. 404
  4. Saleem Q., Rehman R. U., 2011, p. 96
  5. Kajananthan R., Velnampy T. 2014 p. 164
  6. Armen S., 2013, p. 399

Author: Justyna Banowska