## What are Cash Flow Ratios?

Cash flow ratios are important financial metrics used by investors and analysts to measure the liquidity, efficiency, and profitability of a company. These ratios help investors to understand how much cash is available to a company to pay its expenses and make investments. Analysts and investors use several cash flow ratios, including the cash flow coverage ratio, cash flow margin ratio, current liability coverage ratio, price to cash flow ratio, and cash flow to net income ratio.

## Cash Flow Coverage Ratio

The cash flow coverage ratio measures the company’s ability to pay its obligations using its cash flow. The calculation of this ratio involves dividing the company’s operating cash flow by its total debt service. The total debt service includes all principal and interest payments on the company’s debt.

A high cash flow coverage ratio indicates that a company has sufficient cash flow to cover its debt service obligations. This means that the company is less likely to default on its debt payments. A low cash flow coverage ratio implies potential difficulty for a company in meeting its debt obligations.

## Cash Flow Margin Ratio

The cash flow margin ratio measures the cash flow generated by a company as a percentage of its sales revenue. To calculate this ratio, divide the company’s operating cash flow by its sales revenue.

A high cash flow margin ratio shows that a company generates substantial cash flow compared to its sales revenue. This suggests that the company is operating efficiently and generating strong profits. Conversely, A low cash flow margin ratio indicates possible struggles in generating adequate cash flow from sales revenue.

## Current Liability Coverage Ratio

The current liability coverage ratio measures a company’s ability to pay its short-term liabilities using its current assets. This ratio is calculated by dividing the company’s current assets by its current liabilities.

A high current liability coverage ratio indicates that a company has sufficient current assets to cover its current liabilities. This means that the company is less likely to have to rely on external financing to meet its short-term obligations. On the other hand, a low current liability coverage ratio suggests that a company may have difficulty meeting its short-term obligations.

## Price to Cash Flow Ratio

The price to cash flow ratio measures a company’s market value relative to its cash flow. Calculate this ratio by dividing the company’s market capitalization by its operating cash flow.

A low price to cash flow ratio suggests that a company might be undervalued by the market. This means that investors may see the company as having strong cash flow potential and potential for growth. Conversely, A high price to cash flow ratio suggests that the market may be overvaluing the company. This means that investors may see the company as having limited cash flow potential and limited potential for growth.

The cash flow to net income ratio measures the amount of cash flow generated by a company relative to its net income. Calculate this ratio by dividing the company’s operating cash flow by its net income.

A high cash flow to net income ratio indicates that a company is generating a significant amount of cash flow relative to its net income. This suggests that the company is operating efficiently and generating strong profits. On the other hand, a low cash flow to net income ratio suggests that a company may be struggling to generate sufficient cash flow from its net income.

## Conclusion

Cash flow ratios are important financial metrics that help investors and analysts to evaluate a company’s liquidity, efficiency, and profitability. By understanding these ratios, investors can make more informed investment decisions and assess the financial health of a company. Some of the most important cash flow ratios include the cash flow coverage ratio, cash flow margin ratio, current liability coverage ratio, price to cash flow ratio, and cash flow to net income ratio.