A:

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 companyâ€™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.

RELATED FAQS

2. ### 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 >>
3. ### How can I calculate the operating cash flow ratio on Excel?

Learn about the operating cash flow ratio, what it measures and how to calculate the ratio in Microsoft Excel. Read Answer >>
4. ### What are some examples of how cash flows can be manipulated or distorted?

Read about some of the most common accounting techniques that can be used to manipulate the operating cash flow on a company's ... Read Answer >>
5. ### What sorts of factors decrease cash flow from operating activities?

Learn about the factors that reduce cash flow from operations. What causes net income to decline, and what other uses and ... Read Answer >>
Related Articles
1. Investing

### Analyze Cash Flow The Easy Way

Find out how to analyze the way a company spends its money to determine whether there will be any money left for investors.
2. Investing

### Evaluating A Statement Of Cash Flows

The metrics for the Statement of Cash Flows is best viewed over time.
3. Investing

### Fundamental Case Study: Is Amazon's Cash Flow Actually Solid? (AMZN)

Review Amazon's cash flow situation, including its free cash flow yield, operating cash flow from organic growth and cash flow from debt financing.
4. Investing

### Free Cash Flow Yield: The Best Fundamental Indicator

Cash in the bank is what every company strives to achieve. Find out how to determine how much a company is generating and keeping.
5. Investing

### Cash Flow From Investing

Cash flow analysis is a critical process for both companies and investors. Find out what you need to know about it.
6. Investing

### Free Cash Flow Yield: A Fundamental Indicator

Free cash flow can measure a businessâ€™s performance as if youâ€™re looking at its net income line.
7. Investing

### Cash Flow On Steroids: Why Companies Cheat

Pressure to be the best can sometimes push corporations to cheat. Learn how they do it and how to spot it.

### Understanding Cash Flow

Learn about the different types of cash flows and the importance for businesses to properly manage their cash flows.
9. Investing

### Analyze Cash Flow The Easy Way

Cash flow statements reveal how a company spends its money and where that money comes from.
RELATED TERMS
1. ### Cash Value Added - CVA

A measure of the amount of cash generated by a company through ...
2. ### Cash Flow From Operating Activities (CFO)

Cash Flow From Operating Activities (CFO) is an accounting item ...
3. ### Free Cash Flow Yield

An overall return evaluation ratio of a stock, which standardizes ...
4. ### Operating Cash Flow - OCF

Operating Cash Flow (or OCF) is a measure of the amount of cash ...
5. ### Non-Operating Cash Flows

Cash flows (inflows and outflows) that are not related to the ...
6. ### Free Cash Flow To Sales

A ratio that illustrates the percentage of free cash flow to ...
Hot Definitions
1. ### Bond

A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
2. ### Whole Life Insurance Policy

A life insurance contract with level premiums that has both an insurance and an investment component. The insurance component ...
3. ### Compound Annual Growth Rate - CAGR

The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
4. ### Capital Asset Pricing Model - CAPM

A model that describes the relationship between risk and expected return and that is used in the pricing of risky securities. ...
5. ### Internal Rate Of Return - IRR

A metric used in capital budgeting measuring the profitability of potential investments.
6. ### Current Ratio

The current ratio is a liquidity ratio that measures a company's ability to pay short-term and long-term obligations.