Cash Flow Ratios

Although not widely used, cash flow ratios can be useful in determining the adequacy of cash and cash equivalents. Cash flow ratios are used depending upon the critical needs of cash. For example, if cash is critical to servicing long-term debt, than Cash Flow to Long-Term Debt would be a good ratio. If liquid assets are critical to meeting current liabilities, than Cash + Marketable Securities to Current Liabilities would be useful. Some of the variations for cash flow ratios include:

Cash Flow / Total Debt, Cash Flow / Long-Term Debt, Cash + Marketable Securities / Working Capital, Cash + Marketable Securities / Current Liabilities.

Another good cash flow ratio is Operating Cash Flow to Net Income. This ratio shows the extent to which Net Income is supported by operating cash flows. Cash flow from operations is calculated by adjusting Net Income for non-cash items, such as depreciation. Cash flow is reported on the Statement of Cash Flows and cash flow ratios can be calculated from a complete set of financial statements.