In short
The operating cash flow ratio is cash flow from operations divided by current liabilities. It shows whether a company generates enough cash from its business to pay its short-term obligations.
Key takeaways
- It is less affected by accrual estimates than ratios based on balance sheet assets.
- A ratio below 1 suggests the company may need financing to meet current obligations.
- Comparing operating cash flow with net income helps judge earnings quality.
Where it's tested
BAR: Financial Statement Analysis — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
A company reports cash flow from operations of $850,000, capital expenditures of $300,000 and dividends paid of $100,000. Using the common definition (operating cash flow minus capital expenditures), what is free cash flow?