Operating Cash Flow Ratio

Operating cash flow ratio or cash flow from operations ratio is calculated by dividing “cash flow from operations” by “current liabilities”. All cash generated from firm’s core business operations is termed as operating cash. It is different from cash generated through investing and financing in a way that it doesn’t take into account any extra cash generated apart from a business’ core operations. This ratio determines a firm’s liquidity by evaluating its operating cash with respect to its current liabilities.

Inside a cash flow statement non-cash charges are adjusted from a business’ net income which then increases or decreases the working capital. This adjustment results in the final operating cash flow.


Formula to Calculate Operating Cash Flow Ratio

Operating Cash Flow Ratio

Cash Flow From Operations: Revenue from operations + Non cash based expenses – Non cash based revenue

Current Liabilities: It includes Creditors, B/P, Accrued Expenses, Provisions, Short-Term Loans etc.


Example of Operating Cash Flow Ratio

From the below details of Unreal corporation calculate their operating cash flow ratio for quarter ending 30th June 2015

   Net Cash Flow From Operations  Current Liabilities
Q2 2015  200,000  150,000
Operating Cash Flow Ratio Q2 2015  1.33  


Cash flow from operations ratio of 1.33 shows that for every 1 unit of current liability the company had 1.33 units of cash flow from operations during second quarter of 2015.


High & Low Operating Cash Flow Ratio

High cash flow from operations ratio indicates better liquidity position of the firm. There is no standard guideline for operating cash flow ratio, it is always good to cover 100% of firm’s current liabilities with cash generated from operations. So a ratio of 1 & above is within desirable range.

Low cash flow from operations ratio i.e. below 1 indicates that firm’s current liabilities are not covered by the cash generated from its operations. This is not a desirable state for a business and shows a stressed liquidity position.