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Reading Financial Reports for Cash Flow Formulas

By Lita Epstein

Part of Reading Financial Reports For Dummies Cheat Sheet

You’re interested in a company, so you’re reading its financial reports. Part of the test of a viable operation is having enough cash to keep the company going. Use the following formulas to make sure a company has plenty of cash to keep operating.

  • Free cash flow shows you how much money a company earns from its operations that can actually be put in a savings account for future use.

    Free cash flow = Cash provided by operating activities – Capital expenditures – Cash dividends

  • Cash return on sales looks specifically at how much cash is being generated by sales.

    Cash return on sales = Cash provided by operating activities divided by Net sales

  • Current cash debt coverage ratio lets you know whether a company has enough cash to meet its short-term needs.

    Current cash debt coverage ratio = Cash provided by operating activities divided by Average current liabilities

  • Cash flow coverage ratio finds out whether a company has enough money to cover its bills and finance growth.

    Cash flow coverage ratio = Cash flows from operating activities divided by Cash requirements