Understanding Cash Flow Ratios
- What cash flow means and how it reflects a company’s liquidity
- Key cash flow ratios – formulas and their real-world relevance
- How to interpret a cash flow statement effectively
- Insights and conclusions drawn from analyzing cash flow ratios
Why Cash Flow Matters
Cash flow is a critical indicator of a company’s liquidity and operational health. It represents the actual movement of cash in and out of the business—unlike profit and loss statements or balance sheets, which can often be influenced by accounting choices and assumptions.
Cash flow ratios, derived directly from the cash flow statement, offer a more transparent and tamper-resistant measure of a company’s financial position. These statements reveal how well a business generates cash to fund operating expenses, settle debts, and invest in growth. Companies that consistently generate healthy cash flows are often called cash cows, as they are better positioned to withstand economic downturns.
Among the most vital sections of the cash flow statement is the net cash flow from operations (CFO). This figure forms the backbone of several insightful ratios, helping investors and analysts evaluate a company’s operational strength.
Key Cash Flow Ratios and Their Insights
1. Cash Flow from Operations to Sales
What it measures:
The ratio reveals how effectively a company converts its sales into actual operating cash.
Formula:
Net CFO / Total Sales
Consolidated cash flow statement |
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Rs Cr | 202103 | 202003 | 201903 | 201803 | 201703 |
Net Cash from Operating Activities | 2446.87 | 2517.36 | 1071.12 | 1719.67 | 902.27 |
Net Sales | 17397 | 16350.2 | 17548.8 | 14840.52 | 13180.04 |
Net Operating cash flow to sales | 14.06% | 15.40% | 6.10% | 11.59% | 6.85% |
Analysis:
In March 2021 and March 2020, this ratio stood at 14.06% and 15.40%, respectively. These figures suggest strong efficiency in converting sales to operating cash. Higher ratios indicate stronger performance, resembling operating margins but using actual cash instead of accounting profits.
2. Cash Flow Coverage Ratio
What it measures:
This ratio is similar to the interest coverage ratio, but instead of EBIT, it uses cash flow from operations before taxes and interest.
Formula:
CFO (pre-tax and interest) / Interest Obligations
Consolidated cash flow statement |
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Rs Cr | 202103 | 202003 | 201903 | 201803 | 201703 |
Cash flow from operations before interest and taxes | 2650.41 | 2609.82 | 1291.05 | 1966.16 | 1228.67 |
Finance Costs | 442.96 | 280.83 | 181.07 | 162.92 | 102.88 |
Cash flow coverage ratio | 5.98 | 9.29 | 7.13 | 12.07 | 11.94 |
Analysis:
With a current ratio of 5.98%, the company demonstrates sufficient capability to meet interest obligations through its operating cash. Historically, the ratio peaked at 12 times, underscoring its financial robustness during that period.
3. Cash Flow from Operations to Shareholder’s Funds
What it measures:
Mirroring the concept of Return on Equity (RoE), this ratio swaps PAT for CFO to focus on actual liquidity return.
Formula:
Net CFO / Shareholder’s Funds
Consolidated cash flow statement |
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Rs Cr | 202103 | 202003 | 201903 | 201803 | 201703 |
Net Cash from Operating Activities | 2446.87 | 2517.36 | 1071.12 | 1719.67 | 902.27 |
Total Shareholder's Fund | 9472.56 | 7692.15 | 7641.16 | 7260.61 | 5331.19 |
Average of Shareholder's Fund | 8582.3 | 7666.66 | 7450.89 | 6295.90 | 4994.51 |
CFO/ Total shareholder’s Fund | 28.51% | 32.84% | 14.38% | 27.31% | 18.07% |
Analysis:
Though healthy over the past two years, a growing equity base since March 2018 has slightly diluted the ratio. Still, the cash return on equity remains strong.
4. Asset Efficiency Ratio
What it measures:
This ratio shows how efficiently a company’s total assets generate cash from operations, similar to the asset turnover ratio.
Formula:
Net CFO / Total Assets
Consolidated cash flow statement |
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Rs Cr | 202103 | 202003 | 201903 | 201803 | 201703 |
Net Cash from Operating Activities | 2446.87 | 2517.36 | 1071.12 | 1719.67 | 902.27 |
TOTAL ASSETS | 19163.45 | 16481.99 | 13648.94 | 13142.58 | 9876.01 |
Average total assets | 17822.72 | 15065.47 | 13395.76 | 11509.3 | 8697.78 |
Net CFO to total assets | 13.73% | 16.71% | 8.00% | 14.94% | 10.37% |
Analysis:
Despite past higher turnover, recent investments in fixed assets have temporarily lowered returns. As revenue scales with these investments, the ratio is expected to improve over time.
5. Cash Generating Power Ratio
What it measures:
It assesses how much of the company’s total cash inflows are internally generated, versus borrowed or raised through asset sales.
Formula:
CFO / (CFO + Investing Inflows + Financing Inflows)
Consolidated cash flow statement |
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Rs Cr | 202103 | 202003 | 201903 | 201803 | 201703 |
Net Cash from Operating Activities (a) | 2446.87 | 2517.36 | 1071.12 | 1719.67 | 902.27 |
Cash inflows from investing activities |
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Sale of Fixed Assets | 33.91 | 30.61 | 19.22 | 34.53 | 55.35 |
Capital Subsidy Received | 0 | 17.18 | 85.68 | 122.3 | 155.32 |
Sale of Investments | 0 | 0 | 364.05 | 0 | 0 |
Interest Received | 66.73 | 5.6 | 50.67 | 8.95 | 40.43 |
Dividend Received | 0.29 | 0.27 | 5.08 | 4.58 | 7.85 |
Inter Corporate Deposits | 0 | 0 | 775 | 0 | 330 |
Total Cash inflows from Investing Activities (b) | 100.93 | 53.66 | 1299.7 | 170.36 | 588.95 |
Cash inflow from financing activities |
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Proceeds: |
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Proceeds from Issue of shares (incl share premium) | 0 | 0 | 0 | 1476.15 | 0 |
Proceed from Issue of Debentures | 0 | 0 | 0 | 0 | 0 |
Proceed from 0ther Long Term Borrowings | 1077.55 | 2353.71 | 883.66 | 1503.79 | 1756.9 |
Proceed from Short Term Borrowings | 0 | 846.69 | 0 | 0 | 461.14 |
Cash/Capital Investment Subsidy | 0 | 0 | 0 | 0 | 0 |
Loans from a Corporate Body | 0 | 0 | 0 | 0 | 0 |
Others | 1080 | 0 | 0 | 0 | 0 |
Total Cash inflows from financing Activities (c) | 2157.55 | 3200.4 | 883.66 | 2979.94 | 2218.04 |
Total Cash inflow (a + b + c) | 4705.35 | 5771.42 | 3254.48 | 4869.97 | 3709.26 |
CFO/Total cash inflo | 52.00% | 43.62% | 32.91% | 35.31% | 24.32% |
Analysis:
The company’s dependency on external cash inflows has decreased significantly, from 32.91% in March 2019 to 52% in March 2021. This improvement signals greater financial self-reliance and operational efficiency.
6. External Financing Index Ratio
What it measures:
This ratio tracks the extent of a company’s reliance on external financing.
Formula:
Financing Cash Inflows / Net CFO
Consolidated cash flow statement |
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Rs Cr | 202103 | 202003 | 201903 | 201803 | 201703 |
Net Cash Used in Financing Activities | 152.15 | 472.47 | -62.21 | 2320.88 | 1894.63 |
Net Cash from Operating Activities | 2446.87 | 2517.36 | 1071.12 | 1719.67 | 902.27 |
Cash from financing/net CFO | 6.22% | 18.77% | -5.81% | 134.96% | 209.98% |
Analysis:
The company has successfully reduced its external borrowing needs by boosting its internal cash generation. Earlier high dependence was largely due to investment requirements.
Appendix
Consolidated Profit and Loss Account | 0 | 1 | 2 | 3 | 4 |
RS Cr | Mar-21 | Mar-20 | Mar-19 | Mar-18 | Mar-17 |
REVENUE |
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Net Sales | 17397 | 16350.2 | 17548.84 | 14840.52 | 13180.04 |
Growth (%) | 6.40% | -6.83% | 18.25% | 12.60% | 11.24% |
EXPENSES: |
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Cost of Materials Consumed | 7065.3 | 7049.83 | 8626.09 | 7390.65 | 6044.96 |
Purchases of Stock-in-Trade | 2009.34 | 1834.11 | 1982.56 | 1152.3 | 1080.74 |
Changes in Inventories | 319.87 | 191.65 | -470.39 | -147.45 | -235.64 |
Employee Benefits Expenses | 2513.37 | 2482.2 | 2429.58 | 2156.65 | 1926.97 |
Cost of goods sold | 11907.88 | 11557.79 | 12567.84 | 10552.15 | 8817.03 |
Gross Profit | 5489.12 | 4792.41 | 4981 | 4288.37 | 4363.01 |
Growth (%) | 14.54% | -3.79% | 16.15% | -1.71% | 0.93% |
Gross margin (%) | 31.55% | 29.31% | 28.38% | 28.90% | 33.10% |
Other Expenses | 2691.66 | 2853.69 | 3022.37 | 2637.11 | 2514.28 |
Operating profit (EBITDA) | 2797.46 | 1938.72 | 1958.63 | 1651.26 | 1848.73 |
Growth (%) | 44.29% | -1.02% | 18.61% | -10.68% | -7.45% |
Operating margin (%) | 16.08% | 11.86% | 11.16% | 11.13% | 14.03% |
PBDIT | 2797.46 | 1938.72 | 1958.63 | 1651.26 | 1848.73 |
Growth (%) | 44.29% | -1.02% | 18.61% | -10.68% | -7.45% |
PBDIT margin (%) | 16.08% | 11.86% | 11.16% | 11.13% | 14.03% |
Depreciation and Amortization | 1314.95 | 1138.12 | 812.67 | 592.55 | 461.81 |
EBIT | 1482.51 | 800.6 | 1145.96 | 1058.71 | 1386.92 |
Growth (%) | 85.17% | -30.14% | 8.24% | -23.66% | -11.70% |
EBIT margin (%) | 8.52% | 4.90% | 6.53% | 7.13% | 10.52% |
Finance Costs | 442.96 | 280.83 | 181.07 | 162.92 | 102.88 |
Add: Other Income | 129.38 | 23.68 | 123.12 | 116.54 | 151.81 |
PBT before extraordinary items | 1168.93 | 543.45 | 1088.01 | 1012.33 | 1435.85 |
Growth (%) | 115.09% | -50.05% | 7.48% | -29.50% | -7.13% |
PBT margin (%) | 6.72% | 3.32% | 6.20% | 6.82% | 10.89% |
Extraordinary Items | -607.74 | 0 | -200 | 0 | 0 |
PBT after extraordinary items | 561.19 | 543.45 | 888.01 | 1012.33 | 1435.85 |
Tax Expenses | 211 | 67.04 | 208.29 | 288.45 | 336.55 |
PAT before extraordinary items | 957.93 | 476.41 | 879.72 | 723.88 | 1099.3 |
Growth (%) | 101.07% | -45.85% | 21.53% | -34.15% | 1.94% |
PAT margin (%) | 5.51% | 2.91% | 5.01% | 4.88% | 8.34% |
PAT after extraordinary items | 350.19 | 476.41 | 679.72 | 723.88 | 1099.3 |
Basic EPS | 5.68 | 8.33 | 11.88 | 13.43 | 21.59 |
Diluted EPS | 5.68 | 8.33 | 11.88 | 13.43 | 21.59 |
Consolidated Balance Sheet |
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RS Cr | Mar-21 | Mar-20 | Mar-19 | Mar-18 | Mar-17 |
Shareholder's Funds |
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Share Capital | 63.51 | 57.21 | 57.21 | 57.21 | 50.9 |
Ordinary Capital | 63.51 | 57.2 | 57.2 | 57.2 | 50.9 |
Reserves and Surplus | 9409.05 | 7634.94 | 7583.96 | 7203.41 | 5280.29 |
Total Shareholder's Fund | 9472.56 | 7692.15 | 7641.16 | 7260.61 | 5331.19 |
Non-Current Liabilities |
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Long-Term Borrowings | 3660.43 | 3208.32 | 2443.85 | 1864.39 | 834.03 |
Deferred Tax Liabilities (Net) | 673.37 | 531.27 | 575.46 | 544.34 | 492.73 |
Deferred Tax Liability | 1323.16 | 1078.5 | 872.91 | 735.59 | 576.32 |
Deferred Tax Assets | 649.79 | 547.23 | 297.45 | 191.25 | 83.59 |
Other Long Term Liabilities | 978.71 | 907.44 | 289.48 | 356.5 | 302.7 |
Long-Term Provisions | 49.47 | 50.33 | 49.88 | 45.07 | 39.17 |
Total Non-Current Liabilities | 5361.99 | 4697.37 | 3358.68 | 2810.3 | 1668.63 |
Current Liabilities |
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Short-Term Borrowings | 100.49 | 1118.07 | 292.51 | 647.42 | 784 |
Trade Payables | 1929.26 | 1610.72 | 1368.66 | 1512.57 | 1040.75 |
Other Current Liabilities | 2036.03 | 1127.55 | 741.55 | 553.52 | 625.54 |
Short-Term Provisions | 263.12 | 236.14 | 246.38 | 358.16 | 425.89 |
Total Current Liabilities | 4328.9 | 4092.48 | 2649.1 | 3071.67 | 2876.2 |
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TOTAL EQUITY AND LIABILITIES | 19163.45 | 16481.99 | 13648.94 | 13142.58 | 9876.01 |
Non-Current Assets |
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Fixed Assets | 11264.09 | 10557.26 | 7054.42 | 6385.65 | 5416.64 |
Tangible Assets | 9672.05 | 8632.18 | 6368.08 | 5679.32 | 4770.95 |
Intangible Assets | 37.6 | 32.04 | 31.44 | 34.54 | 24.22 |
Capital Work-in-Progress | 1029.95 | 1272.07 | 654.9 | 671.79 | 621.48 |
Intangible assets under development | 0 | 0 | 0 | 0 | 0 |
Non-Current Investments | 2409.72 | 2409.52 | 2232.57 | 1639.38 | 1004.86 |
Deferred Tax Assets (net) | 0 | 0 | 0 | 0 | 0 |
Deferred Tax Assets | 0 | 0 | 0 | 0 | 0 |
Deferred Tax Liability | 0 | 0 | 0 | 0 | 0 |
Long-Term Loans and Advances | 310.61 | 447.63 | 738.8 | 151.34 | 234.38 |
Other Non-Current Assets | 281.46 | 150.03 | 112.7 | 89.29 | 31.13 |
Total Non-Current Assets | 14265.88 | 13564.44 | 10138.5 | 8265.66 | 6687.02 |
Current Assets |
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Current Investments | 90.07 | 0 | 0 | 1339.05 | 394.44 |
Inventories | 2076.6 | 1808.25 | 2051.48 | 1721.49 | 1729.4 |
Trade Receivables | 732.04 | 445.08 | 779.49 | 550.15 | 386.49 |
Cash and Cash Equivalents | 1400.25 | 236.58 | 217.57 | 260.52 | 139.38 |
Short-Term Loans and Advances | 511.07 | 298.63 | 291.13 | 832.28 | 325.1 |
Other Current Assets | 87.55 | 129 | 170.77 | 173.43 | 214.18 |
Total Current Assets | 4897.57 | 2917.55 | 3510.44 | 4876.92 | 3189 |
TOTAL ASSETS | 19163.45 | 16481.99 | 13648.94 | 13142.58 | 9876.01 |
Consolidated cash flow statement |
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Rs Cr | 202103 | 202003 | 201903 | 201803 | 201703 |
Net Profit before Tax & Extraordinary Items | 561.22 | 543.44 | 888.13 | 1012.33 | 1435.55 |
Adjustment For |
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Depreciation | 1314.95 | 1138.12 | 812.67 | 592.55 | 461.81 |
Interest (Net) | 360.86 | 275.25 | 157.65 | 129.53 | 63.89 |
Dividend Received | -0.29 | -0.27 | -5.08 | -4.58 | -8.46 |
P/L on Sales of Assets | -3.67 | -1.97 | -1.6 | -0.81 | 3.52 |
Prov. & W/O (Net) | 13.16 | 6.51 | 148.1 | 21.61 | 56.08 |
P/L in Forex | -19.29 | 43.75 | -8.57 | -2.74 | -27.85 |
Others | -38.11 | -190.2 | -157 | -97.07 | -32.87 |
Op. Profit before Working Capital Changes | 2188.83 | 1814.63 | 1834.3 | 1650.77 | 1951.67 |
Adjustment For |
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Trade & 0th receivables | -450.07 | 398.42 | 229.23 | -183.47 | -111.41 |
Inventories | -88.4 | 380 | -579.35 | -149.61 | -782.79 |
Trade Payables | 496.19 | 138.35 | -148.98 | 560.62 | 274.32 |
Loans & Advances | 0 | 0 | 0 | 0 | -0.69 |
Others | 503.86 | -121.57 | -44.16 | 87.84 | -102.43 |
Cash flow from operations before interest and taxes | 2650.41 | 2609.82 | 1291.05 | 1966.16 | 1228.67 |
Direct Taxes Paid | -203.54 | -92.46 | -219.94 | -246.48 | -326.41 |
Cash Flow before Extraordinary Items | 2446.87 | 2517.36 | 1071.12 | 1719.67 | 902.27 |
Net Cash from Operating Activities ( a ) | 2446.87 | 2517.36 | 1071.12 | 1719.67 | 902.27 |
Investment in Assets : |
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Purchased Fixed Assets | -1190.22 | -2836.12 | -2293.17 | -3101.72 | -3318.99 |
Sale of Fixed Assets | 33.91 | 30.61 | 19.22 | 34.53 | 55.35 |
Capital Subsidy Received | 0 | 17.18 | 85.68 | 122.3 | 155.32 |
Financial/Capital Investment : |
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Purchase of Investments | -90.02 | -13.4 | -2.45 | -7.19 | -222.82 |
Sale of Investments | 0 | 0 | 364.05 | 0 | 0 |
Interest Received | 66.73 | 5.6 | 50.67 | 8.95 | 40.43 |
Dividend Received | 0.29 | 0.27 | 5.08 | 4.58 | 7.85 |
Inter Corporate Deposits | 0 | 0 | 775 | -925 | 330 |
Others | -1162.66 | -21.45 | -31.39 | -27.29 | -414.85 |
Cash Flow from Investing Activities ( b ) | -2341.98 | -2817.32 | -1027.32 | -3890.83 | -3367.71 |
Proceeds: |
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Proceeds from Issue of shares (incl share premium) | 0 | 0 | 0 | 1476.15 | 0 |
Proceed from 0ther Long Term Borrowings | 1077.55 | 2353.71 | 883.66 | 1503.79 | 1756.9 |
Proceed from Short Tem Borrowings | 0 | 846.69 | 0 | 0 | 461.14 |
Payments: |
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Of the Long Tem Borrowings | -301.89 | -1814.11 | -202.69 | -169.62 | -133.9 |
Of the short term Borrowings | -1097.89 | 0 | -354.43 | -173.35 | 0 |
Of financial Liabilities | -264.94 | -259.56 | 0 | 0 | 0 |
Dividend Paid | 0 | -431.02 | -206.89 | -183.8 | -123.68 |
Interest Paid | -340.67 | -223.24 | -181.86 | -132.3 | -65.83 |
Others | 1080 | 0 | 0 | 0 | 0 |
Net Cash Used in Financing Activities ( c ) | 152.15 | 472.47 | -62.21 | 2320.88 | 1894.63 |
Net Inc/(Dec) in Cash and Cash Equivalent (a + b + c) | 257.05 | 172.51 | -18.41 | 149.72 | -570.82 |
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Cash Flow Summary |
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Cash and Cash Equivalents at Beginning of the year (1) | 634.72 | 462.2 | 480.62 | 330.89 | 589.99 |
Add: Net Inc/(Dec) in Cash and Cash Equivalent (2) | 257.05 | 172.51 | -18.41 | 149.72 | -570.82 |
Cash and Cash Equivalents at End of the year (1 + 2) | 891.77 | 634.72 | 462.2 | 480.62 | 19.18 |
Points to remember
Cash flow statements offer greater reliability because they reflect actual cash movements, making them less susceptible to manipulation.
Cash flow ratios deliver sharper financial insights than traditional income statement metrics.
Net CFO is the core metric when evaluating a company’s liquidity and long-term sustainability.
Tracking trends in these ratios helps detect shifts in operational strength and capital structure over time.