Reading Financial Reports For Dummies, 4th Edition
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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

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Lita Epstein, MBA, enjoys helping people develop good financial, investing, and tax planning skills. She designs and teaches online courses and has written more than 40 books, including Bookkeeping For Dummies and Reading Financial Reports For Dummies.

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