Posts Tagged ‘operating cash flow’

Cash Flow Coverage Ratios

There are several cash flow coverage ratios. Let’s look at two that impact all sizes of companies, including small ones.

Some Preliminaries

The reason I will only discuss two of these ratios is that some of the others rarely impact small companies that are privately and/or closely owned. In both of the ratios we will look at OCF stands for operating cash flow. As a reminder, OCF is calculated as:

Net Income adjusted for non-cash charges and changes in current assets and liabilities. Again for this calculation net income is exclusive of Read the rest of this entry »

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Free Cash Flow Versus Operating Cash Flow

I’ve been writing recently about cash flow, specifically in regards to important ratios to interpret it. The free cash flow to operating cash flow ratio is a useful measurement. Let’s see how it is calculated and what it means.

First Some Definitions

Generally free cash flow (abbreviates as FCF) is considered to be operating cash flow minus capital expenditures. (See Importance of Free Cash Flow)

Operating cash flow (OCF) is calculated as net income adjusted for non-cash charges and changes in current assets and liabilities. (See Operating Cash Flow Defined) In this calculation net income does not show the effect of interest and income taxes, so it is actually earnings before interest and income taxes (Abbreviated EBIT).

Calculating the Free Cash Flow to Operating Cash Flow Ratio

The formula for calculating the free cash flow to operating cash flow ratio, expressed as a percentage is: Read the rest of this entry »

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Understanding the Operating Cash Flow to Sales Ratio

In my last posting I defined what operating cash flow is and how to calculate it. Now I want to see it in relation to sales.

Why in Relation to Sales

Since selling is the primary activity of a company for producing cash flow, the relationship of operating cash flow to sales is a meaningful one.

Operating Cash Flow to Sales Ratio Defined

To calculate the operating cash flow to sales ratio, which is expressed as a percentage, the following formula is used (where OCF stands for operating cash flow):

Operating Cash Flow to Sales Ratio = OCF / Sales Read the rest of this entry »

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Operating Cash Flow Defined

Businesses often focus in on net income and fail to recognize the significance of cash flow (see Cash Flow – The Bottom Line) and what determines cash flow (see Cash Management-It’s Not About the Cash Account). Even when understanding the importance of cash flow and what generates it, there are some additional aspects to understand.

What is Operating Cash Flow

In a future blog I will show how the cash flow statement is created, but for now let’s just identify the three main components of the statement, which are: Read the rest of this entry »

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Importance of Free Cash Flow

In some previous posting I discussed how important it was to convert profits to cash. See Cash Flow – The Bottom Line for more on this. Now let’s look at cash from a different perspective.

Free Cash Flow Defined

Generally free cash flow is considered to be operating cash flow minus capital expenditures. This recognizes that capital spending for things like equipment is necessary if a company is to remain competitive. These capital expenditures help a company become more efficient or even allow them to Read the rest of this entry »

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