The operating cash flow ratio and the operating cash flow margin are different ratios used in fundamental analysis. The operating cash flow ratio measures a company's liquidity in the short term. Conversely, the operating cash flow margin measures a company's efficiency in converting sales to cash.

The operating cash flow ratio is calculated by dividing a company's cash flow from operations by its current liabilities. The operating cash flow, or cash flow from operations, is calculated by subtracting a company's operating expenses from its revenues.

Generally, if the operating cash flow is less than 1, the company has generated less cash from its operations in the period than it needs to pay off its current liabilities. This may indicate there is a need for more capital. Therefore, investors and financial analysts typically prefer higher operating cash flow ratios.

For example, assume company ABC has revenues of $5 million, operating expenses of $3 million and current liabilities of $10 million during the last fiscal year. Company ABC's resulting operating cash flow ratio is 20%, or ($5 million - $3 million)/$10 million * 100%. Therefore, there was less cash generated from the company's operations in the period than it needed to pay off its short-term liabilities.

Operating cash flow margin is calculated by dividing a company's cash flow from operations by its sales. It measures how well a company’s daily operations could convert sales of its products and services into cash. For example, assume company ABC has sales of $2 million. Company ABC's resulting operating cash flow margin is 100%, or ($5 million - $3 million)/$2 million * 100%. This indicates company ABC's operations are efficient in converting sales into cash.

  1. What does the operating cash flow ratio measure?

    Learn about the operating cash flow ratio, how the ratio is calculated and what it indicates about a company. Read Answer >>
  2. What are some ratios I can use the operating cash flow ratio with?

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  3. Why do analysts look at operating cash flow?

    Learn how operating cash flow is used to determine financial health. Examine how cash flow is calculated, and what a low ... Read Answer >>
  4. What is the difference between Operating Cash Flow and Net Operating Income (NOI)?

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  5. Free & operating cash flows: What's the Difference?

    Learn the difference between free cash flow and operating cash flow. Explore how analysts use earnings and cash flow to evaluate ... Read Answer >>
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