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How to Calculate Cash Flow Ratios

Original post by Bryan Keythman of Demand Media

A company’s cash flow from operations is the amount of cash it generates from its normal business operations after paying its operating expenses. If you know a company’s stock price and have access to its financial statements, you can calculate its operating cash flow ratio and its price-to-cash-flow ratio. These measure a company’s ability to pay its short-term debt and the relative market value of its stock.

Step 1

Find a company’s balance sheet and cash flow statement in its 10-K annual report. You can obtain an annual report online from the investor relations page of a company’s website, or from the U.S. Securities and Exchange Commission’s EDGAR database.

Step 2

Find the amount of the company’s cash flow from operating activities, listed in the first section of its cash flow statement. For example, assume the company had $100,000 in cash flow from operating activities.

Step 3

Look for the “Current Liabilities” and “Stockholders’ Equity” sections on the balance sheet. Identify the number of shares outstanding of common stock in the stockholders’ equity section, and identify the amount of total liabilities in the current liabilities section. In this example, assume the company has 100,000 shares of common stock and $50,000 in total current liabilities.

Step 4

Divide the cash flow from operating activities by current liabilities to calculate the operating cash flow ratio. This measures a company’s ability to pay its short-term debt with its cash flow. The higher the ratio the better. In this example, divide $100,000 by $50,000 to get an operating cash flow ratio of 2. This means the company generated cash flow equal to twice its short-term liabilities, which is considered enough to pay them.

Step 5

Divide the cash flow from operations by the number of shares outstanding. Then divide the stock price by your result to calculate the price-to-cash-flow ratio. This measures the amount of money investors are willing to pay for every dollar of cash flow. In this example, divide $100,000 in operating cash flow by 100,000 shares outstanding to get $1. If the company’s stock price is $10 per share, divide $10 by $1 to get a price-to-cash-flow ratio of 10. This means investors are willing to pay $10 for every $1 of operating cash flow.


Tips & Warnings

  • Compare a company’s cash flow ratios with those of its competitors. A company with a higher operating cash flow ratio may have a stronger short-term financial position. A higher price-to-cash-flow ratio may suggest that investors are more optimistic about its future than the future of its competitors.



About the Author

Bryan Keythman has performed stock investment research and writing for a consulting firm since 2008. He also has prior experience sourcing and underwriting commercial real-estate investment and development opportunities for a commercial real-estate developer. Keythman holds a Bachelor of Science in finance.