# Understanding Cash Flow Ratios

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

## Skill Sheet: What You Will Learn Here

Ratios.jpg
• 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