Understanding Cash Flow Formulas
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