A cash flow ratio is any ratio that measures the ability of a firm’s cash flow to support its operations, including:
- Cash-flow-from-operations ratio – Shows the levels of working capital needed to maintain a firm’s operations by comparing the actual cash flows from operations with current liabilities:
CFO ÷ Current Liabilities
- Capital-expenditure (CapEx) ratio – Measures the relationship between a firm’s cash-generating ability and its capital expenditures (CapEx), a ratio greater than 1 indicating the amount of cash the firm has left for debt after payment for capital expenditures:
CFO ÷ CapEx
- Funds from operations to total debt ratio – Funds from operations (i.e., net income from continuing operations, depreciation and amortization, deferred income taxes and other noncash items) compared to the firm’s total debt:
Funds from Operations ÷ Total Debt
- Free operating cash flow to total debt ratio – Free operating cash flow (i.e., funds from operations less capital expenditures less (plus) any increase (decrease) in working capital, excluding changes in cash, marketable securities and short-term debt) relative to total debt, providing information as to the amount of principal current CFO can cover and the firm’s ability to generate enough cash internally to repay its debt:
Funds Operating Cash Flow ÷ Total Debt
Changes in cash flow ratios must be closely reviewed since troubled debtors often cut capital expenditures to generate cash for debt service.