Operating Cash Flow Ratio

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Operating Cash Flow Ratio

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  • 04 Feb, 2019

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An Operating cash flow ratio is the liquidity ratio that measures the performance of the company by considering that how well the company pay off its current liabilities with the cash flow generated from the business operations. The ratio of Operating cash flow can be calculated as - 

 Operating Cash Flow = Cash flow from operations / current liabilities

 

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Operating cash flow can be calculated by dividing the current liabilities from the cash flow operations. Thus it can be found that operating cash flow can be divided into two parts named –

·        Current liabilities – These are the obligations sue within a year. Example of current liabilities are – short term debts, accrued liabilities and accounts payable.

·        Cash flow from operations – These are the statement of cash flows of the company. The cash flow from operations involves net income + changes in working capital + non- cash expenses.

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The operating cash flow ratio measures the short term liquidity of the company. It measures how well the current liabilities of the company are covered by the operations of the company. The good financial health of any company is determined by the high operating cash flow. Further, the operating cash flow is the cash equivalent of net income. It is the type of cash flow which considers the operating expenses for financing the new activities of the business. The cash flow from operations and net income both provides an adequate quality of an enterprise’s earnings.

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