Operating Cash Flow Ratio Template

What is the Operating Cash Flow Ratio?

The Operating Cash Flow Ratio, a liquidity ratio, is a measure of how well a company can pay off its current liabilities with the cash flow generated from core business operations. In other words, the operating cash flow ratio shows how much a company earns from its operating activities per dollar of current liabilities. Since earnings involve accruals and can be manipulated by management, the operating cash flow ratio is considered a more accurate measure of a company’s short-term liquidity.

The operating cash flow ratio measures a company’s short-term liquidity. If the ratio is less than 1, the company generated less cash from operations than needed to pay off its short-term liabilities. This signals short-term problems and a need for more capital. A higher ratio  – greater than 1.0 – is preferred by investors, creditors, and analysts, as it means a company can cover its current short-term liabilities and still have earnings left over. Companies with a high or increasing operating cash flow ratio are generally considered to be in good financial health.

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