By Richard Loth (Contact | Biography)
This section of the financial ratio tutorial looks at
cash flow indicators, which focus on the cash being generated in terms of how much is being generated and the safety net that it provides to the company. These ratios can give users another look at the financial health and performance of a company.
At this point, we all know that profits are very important for a company. However, through the magic of accounting and non-cash-based transactions, companies that appear very profitable can actually be at a financial risk if they are generating little cash from these profits. For example, if a company makes a ton of sales on credit, they will look profitable but haven't actually received cash for the sales, which can hurt their financial health since they have obligations to pay.
The ratios in this section use cash flow compared to other company metrics to determine how much cash they are generating from their sales, the amount of cash they are generating free and clear, and the amount of cash they have to cover obligations. We will look at the
operating cash flow/sales ratio,
free cash flow/operating cash flow ratio and cash flow coverage ratios.
To find the data used in the examples in this section, please see the Securities and Exchange Commission's website to view the
2005 Annual Statement of Zimmer Holdings.
