![]() (Note that if current liabilities vary significantly from one period to the next, some analysts prefer to use average current liabilities. The denominator, current liabilities, comes from the liabilities section of the balance sheet. The numerator, cash provided by operating activities, comes from the bottom of the operating activities section of the statement of cash flows. Key Equation Operating cash flow ratio = Cash provided by operating activities Current liabilities Yamamura, “The Power of Cash Flow Ratios,” Journal of Accountancy, October 1998.) We will use two large home improvement retail companies, The Home Depot, Inc., and Lowe’s Companies, Inc., to illustrate these measures. (Further coverage of these measures can be found in the following article: John R. What measures are commonly used to evaluate performance related to cash flows?Īnswer: Three common cash flow measures used to evaluate organizations are (1) operating cash flow ratio, (2) capital expenditure ratio, and (3) free cash flow. However, analysis of cash flow information is becoming increasingly important to managers, auditors, and outside analysts. ![]() In fact, financial results presented to the investing public typically focus on earnings per share ( Chapter 13 "How Do Managers Use Financial and Nonfinancial Performance Measures?" discusses earnings per share in detail). Question: Companies and analysts tend to use income statement and balance sheet information to evaluate financial performance.
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