How do you communicate the implications of OCF ratio and FCF ratio to your stakeholders or clients? (2024)

FAQs

How do you communicate the implications of OCF ratio and FCF ratio to your stakeholders or clients? ›

When you communicate the OCF and FCF ratios to your stakeholders or clients, you need to explain what they mean, how they are calculated, and how they compare to the industry benchmarks or the historical trends.

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.

Operating cash flow is one of the key indicators of a business's health. Will the business be able to pay its employees, purchase inventory, invest in new capital, and, in general, keep its doors open for the foreseeable future? A solid operating cash flow signals to investors that the business is healthy.

The operating cash flow ratio indicates if a company's normal operations are sufficient to cover its near-term obligations. A higher ratio means that a company has generated more cash in a period than what was immediately needed to pay off current liabilities.

Operating cash flow measures cash generated by a company's business operations. Free cash flow is the cash that a company generates from its business operations after subtracting capital expenditures.

A good price-to-cash-flow ratio is any number below 10. Lower ratios show that a stock is undervalued when compared to its cash flows, meaning there is a better value in the stock. This can be perceived as a signal to buy.

The cash ratio indicates to creditors, analysts, and investors the percentage of a company's current liabilities that cash and cash equivalents will cover. A ratio above 1 means that a company will be able to pay off its current liabilities with cash and cash equivalents, and have funds left over.

The cash flow statement holds immense significance in financial reporting, primarily for its role in liquidity assessment. This essential financial document provides a comprehensive view of a company's cash inflows and outflows, enabling stakeholders to gauge its short-term financial health.

The cash flows to creditors and stockholders represent the net payments to creditors and owners during the years. Their calculation is similar to that of cash flow from assets. Cash flow to creditors is interest paid less net new borrowing; cash flow to stockholders is dividends paid less net new equity raised.

Operating cash flow (OCF) is a measure of the amount of cash generated by a company's normal business operations. Operating cash flow indicates whether a company can generate sufficient positive cash flow to maintain and grow its operations, otherwise, it may require external financing for capital expansion.

How do you analyze cash flow ratio? ›

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. A cash flow ratio of less than one indicates the opposite—the firm has not generated enough cash to cover its current liabilities.

A “good” free cash flow conversion rate would typically be consistently around or above 100%, as it indicates efficient working capital management. If the FCF conversion rate of a company is in excess of 100%, that implies operational efficiency.

Cash flow ratios compare a company's cash flows to other elements of its financial statement, and they measure how well a business can pay off its liabilities. These equations are vital to many financial careers and can help professionals better analyze a company's financial health.

Why free cash flow is important. The “free” in free cash flow means how much a business has in its coffers to spend. Considered a reliable measure of business performance, free cash flow provides a glimpse of how much cash your business really has to draw on.

Free Cash Flow = Cash from Operations – CapEx

It shows the cash that a company can produce after deducting the purchase of assets such as property, equipment, and other major investments from its operating cash flow.

Operating cash flow (OCF) is how much cash a company generated (or consumed) from its operating activities during a period. The OCF calculation will always include the following three components: 1) net income, 2) plus non-cash expenses, and 3) minus the net increase in net working capital.

The higher your cash coverage ratio, the better the financial condition your business is in. But how do you know when you should be concerned? Any time that your cash coverage ratio drops below 2 can signal financial issues, while a drop below 1 means your business is in danger of defaulting on its debts.

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.

Intuitively, a lower ratio indicates that less operating profits are available to meet interest payments and that the company is more vulnerable to volatile interest rates. Therefore, a higher interest coverage ratio indicates stronger financial health – the company is more capable of meeting interest obligations.

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.