Cash Flow Indicator Ratios: Operating Cash Flow/Sales Ratio
AAA
  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. Convention Statement

    A document filed by an insurance or reinsurance company that ...
  2. Enterprise Value (EV)

    A measure of a company's value, often used as an alternative ...
  3. Earned Premium

    The amount of total premiums collected by an insurance company ...
  4. Insurance Regulatory Information System (IRIS)

    A collection of databases and tools used to analyze the financial ...
  5. Book Value Reduction

    Reducing the value at which an asset is carried on the books ...
  6. Appraised Equity Capital

    The excess of the market value of an asset over its book value. ...
  1. How is accounting in the United States different from international accounting?

    Learn how accounting standards differ between the International Financial Reporting Standards, or IFRS, and generally accepted ...
  2. How do I find the information needed for input into the Dividend Discount Model (DDM)?

    Learn where analysts and investors can find the three pieces of necessary information that allow them to calculate the dividend ...
  3. What does the Dividend Discount Model (DDM) show an investor about a company?

    Discover the purpose of the dividend discount model, or DDM, of stock analysis and what it specifically aims to evaluate ...
  4. If a company has a high debt to capital ratio, what else should I look at before ...

    Learn about some of the financial leverage and profitability ratios that investors can analyze to supplement examining the ...

You May Also Like

Related Tutorials
  1. Investing Basics

    Industry Handbook

  2. Bonds & Fixed Income

    Investing For Safety and Income Tutorial

  3. Fundamental Analysis

    Discounted Cash Flow Analysis

  4. Fundamental Analysis

    Ratio Analysis Tutorial

  5. Economics

    American Depositary Receipt Basics

Trading Center