# How to Calculate Cash Flow Ratios

by Kathy Zheng

The three financial statements that every company produces include the income statement, the balance sheet and the statement of cash flows. The cash flow statement provides information about the state of funds moving through your firm. The balance sheet describes the amount of assets, liabilities and owner's equity in the firm. Using the data in these statements you can calculate cash flow ratios such as the quick ratio, the current ratio and the operating cash flow ratio.

1. Find the current assets and current liabilities on the balance sheet. They are line items on the balance sheet. Divide the current assets by the current liabilities to find the current ratio, which is a fast way to calculate a firm's health. If the company has \$600,000 in current assets and \$200,000 in current liabilities, the current ratio (\$600,000 divided by \$200,000) equals 3.0 times.

2. Sum the cash, cash equivalents and accounts receivable which are all line items on the balance sheet. Take this total and divide by the current liabilities which is also on the balance sheet. The result will equal the quick ratio which is a better measure of a firm's solvency. If the company has \$100,000 in cash, \$50,000 in cash equivalents and \$150,000 in accounts receivable as well as \$150,000 in current liabilities, the quick ratio is ((\$100,000 plus \$50,000 plus \$150,000) divided by \$150,000) equals 2.0 times.

3. Find the cash flow from operations on the cash flow statement. Divide that number by the current liabilities on the balance sheet to find the operating cash flow ratio. This number gives analysts an idea of how much cash the company can provide beyond its liability payments. If the company has \$900,000 in cash flow from operations as well as \$150,000 in current liabilities, the operating cash flow ratio is (\$900,000 divided by \$150,000) equals 6.0 times.

4. Obtain the operating cash flow from the cash flow statement and divide by the total sales found at the top of the income statement. This number describes the efficiency of the company's efforts of turning sales into cash. If the company has \$200,000 in operating cash flow and \$1,000,000 in sales, the calculation is (\$200,000 divided by \$1,000,000) equals 0.2 times.

#### Things Needed

• Cash flow statement
• Calculator

#### Tip

• Use audited financial statements for accuracy.

#### About the Author

Kathy Zheng is a personal financial planner. She holds a Bachelor of Arts in economics and is certified as a level 1 financial adviser.

#### Photo Credits

• Jupiterimages/Photos.com/Getty Images
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