Reading Financial Reports for Cash Flow Formulas
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