Cash is the main lever for the financial performance of a firm’s equity
shareholders, debt investors, and other partners. Let us discuss how to evaluate the cash flow management efficiency of an organization.
Let us look at the financial position of Priyanka Vaishnavi Limited (PV) for the latest financial year: Cash from Operations (CFO) Rs 12,500
crore; Capital expenditure Rs 5,000 crore; The current liabilities are Rs 6,500 crore. It has no interest-bearing short-term debt, long-term
a debt of Rs 8,000 crore, and net income of Rs 6,250 crore.
Cash flow types: Cash flow is divided into three variants; That is, operating cash flow (cash flow from operating activities or CFOs), cash flow from investment activities, and cash flow from financing activities. Of these,
CFOs are crucial in meeting the cash flow of an organization’s day-to-day operations. An organization must have a good account of the
CFO to attract the attention of investors (debt and equity).
Piotroski’s F-Score Framework offers a positive rating to an organization with a positive score in its CFO. Cash Flow Management Ratios: The following four ratios can be used by young investors to assess the cash flow
management of targeted firms. CFO to Net Income This ratio is called the quality of the income ratio.
It is calculated by dividing the CFO by the profit (PAT or net income) of an entity. If the CFO exceeds the net income, it is assumed that the firm will be able to convert its accounting (actual) income into cash. Otherwise, the firm has poor cash flow management practices.
For PV, this is twice as much (= CFO of Rs 12,500 crore / PAT of Rs 6,250 crore), indicating that the company is good at managing cash flow. CFO to Capex Capex refers to capital expenditure. This ratio is calculated by dividing a CFO by the capital of an organization. It reveals the organization’s ability to finance its Capex with money generated from operating activities. For PV, it is 2.5 times (CFO Rs 12,500 crore / Capex Rs 5,000 crore).
The company is good at this metric because Capex has Rs 2.5 for every Rs 1in Capex. CFO to total debt It is calculated by dividing the CFO by
the total debt (the amount of interest incurred on current and long-term debt). For a healthy institution, this ratio should be at least one.
The total debt of PV is Rs 8,000 crore. This is 1.56 times the CFO of PV’s total debt (CFO of Rs 12,500 crore / total debt of Rs 8,000 crore). This
reflects that PV is attractive to its lenders as it has a CFO of 1.5 times the total debt. CFO to current liabilities It is calculated by dividing the
CFO by the current liabilities of an organization.
The higher the CFO in relation to current liabilities, the better the ability of an organization to repay current liabilities. In the case of PV, it is 1.92 times (i.e Rs 12,500 crore / Rs 6,500 crore), which shows that the company is
efficient in paying its current liabilities.