Common-Size Analysis

Common-sizing the cash flow statement can help to easily tell if a company has sufficient cash to undertake certain activities, such as capital expenditures and debt repayment.

There are two approaches to the common-size analysis of a cash flow statement. The first approach involves the expression of each line item of cash inflow as a percentage of total cash inflows and each cash outflow as a percentage of the total cash outflow. When a cash flow statement is presented using the indirect method, however, the operating cash inflows and outflows are not presented separately. As a result, the common-size cash flow statement will only show the net operating cash flow as a percentage of the total inflows or outflows (dependent on whether or not the net amount was a cash inflow or outflow).

The second approach entails the expression of each line item on the cash flow statement as a percentage of net revenue.

Cash Flow Ratios

The cash flow statement may also be used in financial ratios measuring a company's profitability, performance, and financial strength.

Performance Ratios

• Cash flow to revenue = CFO / Net revenue: cash generated per dollar of revenue.
• Cash return on assets = CFO / Average total assets: cash generated from all resources.
• Cash return on equity = CFO / average shareholders' equity: cash generated from owner resources.
• Cash to income = CFO / Operating income: cash-generating ability of operations.
• Cash flow per share = (CFO - Preferred dividends) / number of common shares outstanding: operating cash flow on a per-share basis.

Coverage Ratios

• Debt coverage = CFO / Total debt: financial risk and financial leverage.
• Interest coverage = (CFO + Interest Paid + Taxes paid) / Interest paid: ability to meet interest obligations.
• Reinvestment = CFO / Cash paid for long-term assets: ability to acquire assets with operating cash flows.
• Debt payment = CFO / Cash paid for long-term debt repayment: ability to pay debt with operating cash flows.
• Dividend payment: CFO / Dividends paid: ability to pay dividends with operating cash flows.
• Investing and financing: CFO / Cash outflows for investing and financing activities: ability to acquire assets, pay debts, and make distributions to owners.