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. Earned Premium

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

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

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

    The excess of the market value of an asset over its book value. ...
  5. Asset Valuation Review (AVR)

    A process that establishes an estimate of the value of a failed ...
  6. Derived Investment Value (DIV)

    A valuation methodology used to calculate the present value of ...
  1. Are small cap companies more risky investments than large cap companies?

    Learn about the risk of small cap companies compared to large cap companies. Compare the volatility of both and learn how ...
  2. What is the formula for calculating internal rate of return (IRR) in Excel?

    Understand how to calculate the internal rate of return (IRR) using Excel and how this metric is used to determine anticipated ...
  3. What main factors affect share prices in the metals and mining sector?

    Discover the primary factors that influence share prices of companies in the metals and mining sector and how companies can ...
  4. Why do investors with minority interest receive a minority interest discount and ...

    Discover why investors with minority interest usually receive a discount to the fair value of their ownership share, and ...

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