Cash Flow Ratios

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Cash Flow Ratios

The cash flow statement is one of the four main financial statements of a company. The cash flow statement can be examined to determine the short-term sustainability of a company. If cash is increasing (and operational cash flow is positive), then a company will often be deemed to be healthy in the short-term. Increasing or stable cash balances suggest that a company is able to meet its cash needs, and remain solvent. This information cannot always be seen in the income statement or the balance sheet of a company. For instance, a company may be generating profit, but still have difficulty in remaining solvent.

Cash Flow Growth Annual Change:
Cashflow should increase at the same rate as Sales - or greater.

Current Yr Cash from Operations	- 1 = Cash Flow Growth Annual Change

Prior Year Cash from Operations

Free Cash Flow Margin:
Free Cashflow is what's left over after all capital spending has been deducted. A margin of 10 represents a reasonable return on your investment. If less than 10, what are they doing with their cash, and is that a reasonable use of cash?

Net Cash from Operations - PP&E - Dividends	= Free Cash Flow Margin

Revenues

Return on Free Cash Flow
Free Cashflow is the Net Cash provided by Operations less Dividends, less Property Plant & Equipment. It is cash which can be used for any purpose management wishes -- it's what is left over after all expenses are paid. It could be used to pay down debt, buy back shares, or used for new equipment or manufacturing plant, etc. If the return on Free Cashflow is not greater than the 10 year Bond rate, what is the company doing with it's cash? It may mean there won't be enough to pay future Dividends, or it may mean that the company has been spent cash on new equipment or a plant. If so, you need to determine if there will be an increased future need for the product produced. If Accounts Receivable and/or Inventories are showing an increasing trend, perhaps a new plant or equipment is not needed. Look at more than one year to see the long-term trend.

Cash Position per Share:
This represents the amount of cash purchased with each share of stock purchased, or held. There is little risk in cash, therefore the actual risk in each share of stock is the price per share less this amount. A small or negative amount isn't significant. But if cash is shrinking and debt is growing, the company may be in weak financial shape. If this represents 20% or more of the stock price, it is becoming significant.

Compare Net Income Annual Change with Net Cash Annual Change:
Compare the income with the net cash to make sure that the number of sales on credit is not increasing.

Free Cash Flow per Share:
Free Cashflow can be used by management in any way they please -- buy back shares, acquire a company, invest in new property plant or equipment, etc. It represents cash which you are purchasing at the time you buy a share of stock. This means the amount at risk in buying a share is reduced by this amount. For example, when a firm's share price is low and free cash flow is on the rise, the odds are good that earnings and share value will soon be on the up, because a high cash flow per share value means that earnings per share should potentially be high as well.

Buying cash has no risk. Example: If a share is priced at $30 and the "Free Cashflow per share" is equal to $10, only $20 is at risk for each share owned. If this value represents 10% or more of the per share price, it is VERY positive.