How do you communicate the implications of OCF ratio and FCF ratio to your stakeholders or clients? (2024)

FAQs

How do you communicate the implications of OCF ratio and FCF ratio to your stakeholders or clients? ›

When you communicate the OCF and FCF ratios to your stakeholders or clients, you need to explain what they mean, how they are calculated, and how they compare to the industry benchmarks or the historical trends.

The greater the coverage ratio is over 1.2, the better a company's ability to meet its obligations along with having sufficient cash flow to expand its business, participate in the long-term reinvestment strategy, withstand commodity pressures and not be burdened with debt over the long term.

The operating cash flow ratio indicates if a company's normal operations are sufficient to cover its near-term obligations. A higher ratio means that a company has generated more cash in a period than what was immediately needed to pay off current liabilities.

Operating cash flow measures cash generated by a company's business operations. Free cash flow is the cash that a company generates from its business operations after subtracting capital expenditures.

Operating cash flow indicates whether a company can generate sufficient positive cash flow to maintain and grow its operations, otherwise, it may require external financing for capital expansion.

The cash coverage ratio is a calculation that determines a business's ability to pay off its liabilities with its existing cash. It is how you can measure a business's liquidity. The cash coverage ratio includes only cash and cash equivalents. It does not include things like accounts receivable or inventory.

Generally, a good Liquidity Ratio should be above 1.0. This indicates the company has enough current assets to cover its short-term liabilities. A higher Liquidity Ratio (above 2.0) shows the company is in a stronger financial position and may have spare cash available for investments or other opportunities.

Why free cash flow is important. The “free” in free cash flow means how much a business has in its coffers to spend. Considered a reliable measure of business performance, free cash flow provides a glimpse of how much cash your business really has to draw on.

The simplest way to calculate free cash flow is by finding capital expenditures on the cash flow statement and subtracting it from the operating cash flow found in the cash flow statement.

The FCF ratio is the ratio of free cash flow to operating cash flow. Free cash flow is the cash left over after deducting capital expenditures from operating cash flow. Capital expenditures are the cash spent on acquiring or maintaining long-term assets, such as buildings, equipment, and software.

Why is the cash flow statement important to stakeholders? ›

The cash flow statement holds immense significance in financial reporting, primarily for its role in liquidity assessment. This essential financial document provides a comprehensive view of a company's cash inflows and outflows, enabling stakeholders to gauge its short-term financial health.

Keep in mind that if the net cash or net operating cash flow of your business is regularly higher than its net income, that indicates that your business is profitable.

Operating cash flow (OCF) is the lifeblood of a company and arguably the most important barometer that investors have for judging corporate well-being. Although many investors gravitate toward net income, operating cash flow is often seen as a better metric of a company's financial health for two main reasons.

A ratio above one indicates that a company can service the interest on its debts using its earnings or has shown the ability to maintain revenues at a fairly consistent level. While an interest coverage ratio of 1.5 may be the minimum acceptable level, two or better is preferred for analysts and investors.

The higher your cash coverage ratio, the better the financial condition your business is in. But how do you know when you should be concerned? Any time that your cash coverage ratio drops below 2 can signal financial issues, while a drop below 1 means your business is in danger of defaulting on its debts.

Calculations Less Than 1

There are more current liabilities than cash and cash equivalents when a company's cash ratio is less than one. Insufficient cash is on hand to pay off short-term debt.

The asset coverage ratio is a financial metric that measures how well a company can repay its debts by selling or liquidating its assets. The higher the asset coverage ratio, the more times a company can cover its debt.