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Explain the performance ratios by using cash flow from operations
The performance ratios help in understanding the financial statements and give a better view of business.
Company calculates these ratios regularly to see how well they are using their own resources and gives their performance.
Some of the advantages of performance ratios for a company are forecasting, budget estimation and determination of the firm’s liquidity and long term solvency.
Some of the disadvantages are it is more complicated and comparison becomes ambiguous because companies mostly work in different environments, market, regulation etc.
Performance ratios
The various performance ratios in company are as follows−
- Cash flow to revenue (CFr) = Ratio between cash flows generated (CFg) from operations to net revenue (NR)
CFr = CFg/NR
- Cash return on assets (CRa) = Ratio between cash flows generated (CFg) from operations to total assets (average) {TAa}
CRa = CFg/TAa
- Cash to income(Ci) = Ratio between cash flows generated (CFg) from operations to operating income (OI)
Ci = CFg/OI
- Cash flow per share (CFs) = Ratio between preferred dividends (Pd) (cash flow generated from operations) to total number of outstanding shares (OS)
CFs = Pd/OS
- Debt payment (Dp) = Ratio of cash flows generated (CFg) from operations to payment for long term debts (LTd)
Dp = CFg/ LTd
- Dividend payments (Dp) = Ratio of cash flows generated (CFg) from operations to dividends to be paid
Dp = CFg/ dividends to be paid
- Investing and Financing (I&F) = Ratio of cash flows generated (CFg) from operations to outflow of cash on investing and financing activities (Co)
I&F = CFg/ Co
- Debt coverage (Dc) = Ratio of cash flows generated (CFg) from operations to total debt(Td)
Dc = CFg/Td
- Interest coverage (IC) = Ratio of (cash flows generated (CFg) from operations plus interest and taxes (Ia&T) paid) to interest paid (Ip)
IC = CFg+ (Ia&T)/Ip
- Reinvestment (R) = Ratio of cash flows generated (CFg) from operations to cash spent to acquire long-term assets (LATc)
R = CFg/LATc
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