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Understanding Cash Flow Formulas

Part of the Interpreting Company Reports Cheat Sheet For Dummies (UK Edition)

When studying a company report, use the following formulas to make sure a company has plenty of cash to keep operating so you can make a profitable investment decision.

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

    Free cash flow = Cash provided by operating activities – Net cash used in investing activities – Dividends paid – Interest paid – Tax paid

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

    Cash return on sales = Cash provided by operating activities 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 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 cash requirements

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