What is a cash flow ratio? (2024)

FAQs

What is a cash flow ratio? ›

A cash flow ratio is a measure of the number of times a company can pay off current debts with cash generated within the same period. A high number, greater than one, indicates that a company has generated more cash in a period than what is needed to pay off its current liabilities.

Operating cash flow ratio

This ratio calculates how much cash a business makes from its sales. A preferred operating cash flow number is greater than one because it means a business is doing well and the company has enough money to operate.

What is a good price to cash flow ratio? A good price to cash flow ratio is anything below 10. The lower the number, the better the value of the stock.

What is a good cash flow to sales ratio? A cash flow to sales ratio is considered good if it falls between 10% and 55%.

Conversely, a ratio lower than 1.0 shows that the business is generating less money than it needs to cover its liabilities and that refinancing or restructuring its operations could be an option to increase cash flow. In some cases, other versions of the ratio may be used for other debt types.

A healthy cash flow ratio is a higher ratio of cash inflows to cash outflows. There are various ratios to assess cash flow health, but one commonly used ratio is the operating cash flow ratio—cash flow from operations, divided by current liabilities.

A cash ratio lower than one does sometimes indicate that a company is at risk of having financial difficulty. However, a low cash ratio may also be an indicator of a company's specific strategy that calls for maintaining low cash reserves, such as because funds are being used for expansion.

To have a healthy free cash flow, you want to have enough free cash on hand to be able to pay all of your company's bills and costs for a month, and the more you surpass that number, the better. Some investors and analysts believe that a good free cash flow for a SaaS company is anywhere from about 20% to 25%.

A higher ratio – greater than 1.0 – is preferred by investors, creditors, and analysts, as it means a company can cover its current short-term liabilities and still have earnings left over. Companies with a high or uptrending operating cash flow are generally considered to be in good financial health.

Well, while there's no one-size-fits-all ratio that your business should be aiming for – mainly because there are significant variations between industries – a higher cash flow margin is usually better. A cash flow margin ratio of 60% is very good, indicating that Company A has a high level of profitability.

What is a healthy cash flow coverage ratio? ›

The greater the coverage ratio is over 1.2, the better a company's ability to meet its obligations along with having sufficient cash flow to expand its business, participate in the long-term reinvestment strategy, withstand commodity pressures and not be burdened with debt over the long term.

Usually, a healthy company has a cash ratio of 0.5 or more. Below that number, it can be surmised that the company is not using its assets well. On the other hand, if a company has a cash ratio of more than 1, it means that it is able to pay off its debts with ease while still having liquid assets left over.

An abnormally high ratio means the company holds a large amount of liquid assets. For example, if a company's cash ratio was 8.5, investors and analysts may consider that too high. The company holds too much cash on hand, which isn't earning anything more than the interest the bank offers to hold their cash.

A common benchmark used by real estate investors is to aim for a cash flow of at least 10% of the property's purchase price per year. For example, if a property is purchased for $200,000, the annual cash flow should be at least $20,000 ($1,667 per month).

There is no ideal figure, but a ratio of at least 0.5 to 1 is usually preferred. The cash ratio may not provide a good overall analysis of a company, as it is unrealistic for companies to hold large amounts of cash.

A good cash flow ratio, often referred to as the “cash flow coverage ratio,” should typically be higher than 1.0. This means the business has ample cash to cover its debts. The ratio is calculated by dividing the cash flow from operating activities by the total debt that needs to be paid within the same period.