Cash Flow Indicator Ratios: Operating Cash Flow/Sales Ratio
  1. Cash Flow Indicator Ratios: Introduction
  2. Cash Flow Indicator Ratios: Operating Cash Flow/Sales Ratio
  3. Cash Flow Indicator Ratios: Free Cash Flow/Operating Cash Flow Ratio
  4. Cash Flow Indicator Ratios: Cash Flow Coverage Ratios
  5. Cash Flow Indicator Ratios: Dividend Payout Ratio

Cash Flow Indicator Ratios: Operating Cash Flow/Sales Ratio

By Richard Loth (Contact | Biography)

This ratio, which is expressed as a percentage, compares a company's operating cash flow to its net sales or revenues, which gives investors an idea of the company's ability to turn sales into cash.

It would be worrisome to see a company's sales grow without a parallel growth in operating cash flow. Positive and negative changes in a company's terms of sale and/or the collection experience of its accounts receivable will show up in this indicator.

Formula:


Components:

As of December 31, 2005, with amounts expressed in millions, Zimmer Holdings had net cash provided by operating activities of $878.2 (cash flow statement), and net sales of $3,286.1 (income statement). By dividing, the equation gives us an operating cash flow/sales ratio of 26.7%, or approximately 27 cents of operating cash flow in every sales dollar.

Variations:
None

Commentary:
The statement of cash flows has three distinct sections, each of which relates to an aspect of a company's cash flow activities - operations, investing and financing. In this ratio, we use the figure for operating cash flow, which is also variously described in financial reporting as simply "cash flow", "cash flow provided by operations", "cash flow from operating activities" and "net cash provided (used) by operating activities".

In the operating section of the cash flow statement, the net income figure is adjusted for non-cash charges and increases/decreases in the working capital items in a company's current assets and liabilities. This reconciliation results in an operating cash flow figure, the foremost source of a company's cash generation (which is internally generated by its operating activities).

The greater the amount of operating cash flow, the better. There is no standard guideline for the operating cash flow/sales ratio, but obviously, the ability to generate consistent and/or improving percentage comparisons are positive investment qualities. In the case of Zimmer Holdings, the past three years reflect a healthy consistency in this ratio of 26.0%, 28.9% and 26.7% for FY 2003, 2004 and 2005, respectively.

Cash Flow Indicator Ratios: Free Cash Flow/Operating Cash Flow Ratio

  1. Cash Flow Indicator Ratios: Introduction
  2. Cash Flow Indicator Ratios: Operating Cash Flow/Sales Ratio
  3. Cash Flow Indicator Ratios: Free Cash Flow/Operating Cash Flow Ratio
  4. Cash Flow Indicator Ratios: Cash Flow Coverage Ratios
  5. Cash Flow Indicator Ratios: Dividend Payout Ratio
RELATED TERMS
  1. Operating Cash Flow Ratio

    A measure of how well current liabilities are covered by the ...
  2. Cash Flow

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  3. Operating Cash Flow Margin

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  4. Cash Flow From Operating Activities (CFO)

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  5. Cash Value Added - CVA

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RELATED FAQS
  1. What is the difference between the operating the operating cash flow ratio and operating ...

    Find out more about the operating cash flow ratio, the operating cash flow margin, how to calculate these ratios and the ... Read Answer >>
  2. What are some ratios I can use the operating cash flow ratio with?

    Understand the importance of a company's operating cash flow. Learn about some of the financial ratios that use the operating ... Read Answer >>
  3. Are taxes calculated in operating cash flow?

    Learn how taxes are involved with the calculations for operating cash flow, and find out about the importance of operational ... Read Answer >>
  4. How is cash flow from operating activities calculated?

    Discover why cash flow from operating activities is significant to businesses, and learn the direct and indirect methods ... Read Answer >>
  5. What will examining a company's cash flow from operating activities tell an investor?

    Understand what examining a company's cash flow from operating activities tells an investor. Learn why the cash flow statement ... Read Answer >>
  6. What is the difference between Operating Cash Flow and Net Operating Income (NOI)?

    Learn what operating cash flow and net operating income are, how the two metrics are calculated and the main difference between ... Read Answer >>

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