Cash Flow Ratio

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Definition

Cash flow of operations over current liabilities. Because cash flows are harder to manipulate, this can be viewed as a company's ability to cover current liabilities from operations.

A ratio of four means that a company is receiving enough cash flow from operations to cover its current liabilities four times. Generally, the higher this ratio is, the better.

Companies that have increasing cash flow ratios are a good sign of financial health. Common reasons for declining cash flow ratios include rapidly-expanding companies where current liabilities are growing quickly, capital investment projects not making substantial returns, and declining sales.

Formula

YCharts calculates this formula as the CFO (TTM) / Average Current Liabilities.

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