Current Ratio – Formula, Meaning, Assumptions and Interpretations
February 12, 2025
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The formula for this ratio can be easily judged by its name:
Operating Cash Flow to Sales Ratio = Operating Cash Flow / Sales
Sometimes companies do fake transactions to ensure that sales numbers look good to the stock market. However, the acid test comes when sales need to be converted to cash. Only genuine sales bring in cash flow. Thus analysts can make more accurate prediction of the future years cash flows and therefore value the stock more accurately.
For instance if 90 days receivables are outstanding, it means on an average the company extends credit for (90/360), 25% of its sales at any given point of time. Thus in this case the operating cash flow to sales ratio must be 75% or close. This makes the analysts more sure that the financial statements of the firm are indeed genuine.
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