Sample Thesis Paper
The Operating Cash Flow to Revenue Ratio is calculated by dividing the Operating Cash Flow by the sales for the period. This ratio is very important in judging the ability of the company to convert revenue into cash. If the cash figure does not increase in tandem with a revenue upsurge, this means that the company faces trouble in transformation of revenue generated into cash and will suffer in handling day to day operations (Bragg 2003).
Another method used for assessing the company quality of income is a ratio calculated as operating cash flow to operating income. This ratio provides a better view of the company’s efficiency to generate cash flows. However, this has some limitations and may produce variable results in situations where reported earnings include income such as instalment sales or expenses such as depreciation (a non cash flow transaction). The variation between cash flow and earnings because of non cash flow transactions may create abnormal variations in the results from this ratio. This problem can be removed by using operations before interest and taxes divided by income before interest, taxes and depreciation (Mills et al. 2006).