Calculate and Interpret the Operating Cash Flow Ratio

By Stock Research Pro • September 7th, 2009

Operating Cash Flow, also called “cash flow from operating activities”, represents the cash generated by a company through business operations. The general formula for operating cash flow is the company revenues less the costs of company operations. Because it accounts for liabilities, receivables, and depreciation, operating cash flow is often seen as a more accurate measure of the level of cash generated by the company than net income. The operating cash flow ratio is used to measure how well the company’s current liabilities are covered by the cash flow the company generates through its operations. The ratio is most often used to compare companies within an industry and to monitor the performance of any particular company over time.

The Importance of Cash Flow for a Company

An important measure of the overall financial health of a company is the level of cash it generates through normal business operations. As a company operates, cash flows into the business as income and out as expenses. These activities, known as cash flows, are at the heart of all businesses and determine the ability of the company to generate profits and continue its operations.

Calculate the Operating Cash Flow Ratio

The formula for the operating cash flow ratio can be written as:

Operating Cash Flow Ratio = Cash Flow from Operations / Current Liabilities

A company’s operating cash flow can be found in its cash flow statement or “statement of cash flows. This is one of three primary financial statements for a company, along with the balance sheet and income statement.

All else being equal, a higher ratio is generally preferred. If the ratio is lower than one, it can indicate liquidity issues for the company as it has produced less cash over the year than is required for it to pay off its short-term liabilities.


The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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