11. Understanding Cash Flow Ratios

Curated By
Santosh Pasi
Options Trader and Trainer, SEBI registered Research Analyst

Skill Sheet: What You Will Learn Here 

  • Meaning of cash flow and what it tells about a company
  • Cash flow ratios - formulas and applications
  • Importance and use of cash flow statement
  • Analysis and observations based on the ratios

A company’s cash flow indicates its liquidity position. Cash flow is the amount of cash or its equivalent that the company receives or gives out by the way of payments to creditors. Therefore, cash flow ratios are more important and authentic than Profit and Loss Statements and balance sheet ratios, which can be manipulated. Cash flow statements, however, are difficult to manipulate.

Cash flow statements deal with the actual cash flows in a business and are, therefore, more reliable. The companies that generate more cash are called cash cows, as they enjoy a better margin of safety during a downtrend. One can make ratios using the elements of the cash flow statement along with the Profit & Loss account and balance sheet.

One of the most important components in the cash flow statement is net cash flow from operations (CFO). It measures how much cash is generated from business operations. In cash flow ratios, net CFO is the most important element. Let us understand a few important ones:

Cash flow from operations to sales:

This ratio measures how much cash is generated from sales.

Formula: Net CFO/Sales

Consolidated cash flow statement

 

 

 

 

 

(Rs Cr)

Mar 21

Mar 20

Mar 19

Mar 18

Mar 17

Net Cash from Operating Activities

2446.87

2517.36

1071.12

1719.67

902.27

Net Sales

17397

16350.2

17548.84

14840.52

13180.04

Net Operating cash flow to sales

14.06%

15.40%

6.10%

11.59%

6.85%

A brief analysis:

In March 2021 and March 2020, the operating cash flow to sales look healthy at 14.06% and 15.40%, respectively. This shows the efficiency of the company in converting sales into operating cash flows. A higher percentage implies higher efficiency. This ratio is similar to the operating margin ratio, with the only difference being that operating cash flow is used instead of operating profit from the Profit & Loss account.

Coverage ratio:

This ratio is similar to the interest coverage ratio, where we use EBIT. In this ratio, we will use cash flow from operations before taxes and interest.

Consolidated Cash Flow Statement

 

 

 

 

 

(Rs Cr)

Mar 21

Mar 20

Mar 19

Mar 18

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

A brief analysis:

The cash flow coverage ratio is healthy at 5.98% although it has been historically high at 12 times.

Cash Flow from Operations to Shareholder's Funds:

This ratio is similar to return on equity (RoE) except that the PAT is replaced by CFO.

Formula: CFO / Shareholder’s fund

Consolidated cash flow statement

 

 

 

 

 

Rs Cr

Mar 21

Mar 20

Mar 19

Mar 18

Mar 17

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

8582.36

7666.66

7450.89

6295.90

4994.51

CFO/ Total shareholder’s Fund

28.51%

32.84%

14.38%

27.31%

18.07%

A brief analysis:

The CFO/total shareholder's fund has been healthy in the past two years. Historically, it has seen a higher ratio. However, since Mar 2018, there has been an increase in the equity capital resulting in a reduced ratio.

Asset efficiency:

Similar to asset turnover ratio, this ratio measures asset efficiency by comparing net CFO and total assets.

Formula: Net CFO/Total assets

Consolidated cash flow statement

 

 

 

 

 

(Rs Cr)

Mar 21

Mar 20

Mar 19

Mar 18

Mar 17

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%

A brief analysis:

Historically, this company has had a higher total assets turnover. However, it has invested in fixed assets over a period, and, therefore, the returns are much lower. As the volume of sales increases, this ratio will improve.

Cash generating Power Ratio:

This ratio is used to measure the cash generated from operations to the total net CFO, cash flow from investing and cash flow from financing activities. This shows whether the company has to take the help of selling assets or borrowing when the CFO is not strong enough.

Formula: CFO / (CFO + cash from investing inflows + cash from financing inflows)

This ratio can be used to compare the results of this ratio with the peer group.

Consolidated cash flow statement

 

 

 

 

 

(Rs Cr)

Mar 21

Mar 20

Mar 19

Mar 18

Mar 17

Net Cash from Operating Activities (a)

2446.87

2517.36

1071.12

1719.67

902.27

Cash inflows from investing activities

 

 

 

 

 

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

 

 

 

 

 

Proceeds:

 

 

 

 

 

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 inflow

52.00%

43.62%

32.91%

35.31%

24.32%

A brief analysis:

As can be seen in the table above, the company has improved its net CFO to total cash inflow from 32.91% in March 2019 to 52% in March 2021. This shows the company is now less dependent on external inflows and has improved its cash flow from operations.

External financing index ratio:

This cash flow ratio shows how dependent the company is on external borrowings.

Formula: Cash from financing/Net CFO

Consolidated cash flow statement

 

 

 

 

 

Rs Cr

Mar 21

Mar 20

Mar 19

Mar 18

Mar 17

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%

A Brief analysis:

From a high degree of dependency on external borrowings, the company has now reduced its dependency by improving its operating cash flow. The higher dependency was on account of supporting investing activities

Appendix

Consolidated Profit and Loss Account 0 1 2 3 4

(Rs Cr)

Mar 21

Mar 20

Mar 19

Mar 18

Mar 17

REVENUE

 

 

 

 

 

Net Sales

17397

16350.2

17548.84

14840.52

13180.04

Growth (%)

6.40%

-6.83%

18.25%

12.60%

11.24%

EXPENSES:

 

 

 

 

 

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

 

 

 

 

 

RS Cr

Mar-21

Mar-20

Mar-19

Mar-18

Mar-17

Shareholder's Funds

 

 

 

 

 

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

 

 

 

 

 

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

 

 

 

 

 

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

 

 

 

 

 

 

TOTAL EQUITY AND LIABILITIES

19163.45

16481.99

13648.94

13142.58

9876.01

Non-Current Assets

 

 

 

 

 

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

 

 

 

 

 

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

 

 

 

 

 

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

 

 

 

 

 

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

 

 

 

 

 

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 :

 

 

 

 

 

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 :

 

 

 

 

 

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:

 

 

 

 

 

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:

 

 

 

 

 

Of the Long Term 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

 

 

 

 

 

 

Cash Flow Summary

 

 

 

 

 

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 are more reliable as they deal with actual cash flows in a business
  • These ratios are difficult to manipulate, and so it is important to study them
  • Net cash flow from operations (CFO) measures how much cash is generated from business operations, so it is the most important element
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