Thesis: Importance of Cash Flow Ratios

Sample Thesis Paper

Cash flow ratios are important when evaluating a company’s financial health and profitability. They are based on cash flow statements and projection which companies prepare to supplement their planning. Cash flow ratios are part of cash flow planning as suggested by Friedlob and Welton (2008) ‘cash flow ratios are used to examine the adequacy of a company’s cash flows and quality of its earnings. The overall cash flow ratio measures the extent to which cash flow from operations is adequate for the company’s investing and financing activities’ (p.164).

Cash flow ratios assist in relative performance evaluation that can be viewed in terms of ‘sufficiency’ and ‘efficiency’. The sufficiency aspect determines the adequacy of company’s cash flow to meet its operating requirements while efficiency is concerned with the comparing company’s ability to generate enough cash flow over the years and with that of its competitors (Giacomino and Mielke 1993, p. 55-58). Cash flow ratios have traditionally been under used as compared to profit based ratios. However, if a company creates a low amount of cash and yet appears to be making a profit, is still exposed to a hazardous scenario unless it takes some action to create cash. Two major cash flow based ratios are mentioned here – the operating cash flow to revenue ratio and the dividend payout ratio (Loth 2009).

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