Operating cash flow ratio

The operating cash flow ratio measures a company's ability to pay its short term liabilities. It is:

operating cashflow ÷current liabilities

If the operating cash flow ratio is less than one, it means that the company has generated less cash over the year than it needs to pay off short term liabilities as at the year end. This may signal a need to raise money to meet liabilities.

As a refinement, one could deduct the value of deferred income from the current liabilities.

The operating cashflow ratio can be used to compare companies across a sector, and to look at changes over time. Generally, a higher ratio is preferred, but as with all liquidity ratios, sector norms and the peculiarities of each business need to be taken into account.

The current asset ratio and others based on balance sheet numbers gauge liquidity as at the balance sheet date, whereas the operating cashflow ratio uses the cash generated over an accounting period.

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