The cash flow ratio is the ratio of a company’s net cash inflow to its total debts.
- Net cash in flow is the amount of cash which the company has coming into the business from its operations. A suitable figure for net cash inflow can be obtained from the cash flow statement.
- Total debts are short-term and long-term creditors, together with provisions for liabilities and charges. A distinction can be made between debts payable within one year and other debts and provisions.
Obviously, a company needs to be earning enough cash from operations to be able to meet its foreseeable debts and future commitments, and the cash flow ratio, and charges in the cash flow ratio from one year to next, provides a useful indicator of a company’s cash position.