MSG Team's other articles

9074 The Economics of Sports Leagues

The discipline of economics is generally valid for all industries across the world. This is because the basic fundamental economic principles of demand, supply, and free market are applicable to almost all industries in the world. There are only a few industries where these economic principles are not really applicable. The sporting industry is one […]

10054 Issues With Merchandising

In the previous article, we have already studied what merchandising is. We now know why it is an important source of revenue for the sports team. We also know how the business of merchandising is conducted and what are the benefits of the same. However, it needs to be understood that there are a lot […]

9618 How Governments around the World are Bankrupting Future Generations for Present Consumption

The Debt Bomb and its Implications The world is in crisis and one of the reasons for that is the excessive debt held by people, companies, and countries. The west is especially hit hard because of the profligacy of the last three decades starting from the 1970s, which have resulted in a consumerist lifestyle, and […]

10284 Market Indicators For Commodities Investing

All kinds of investing is driven by market sentiment. These sentiments in turn are driven by certain market indicators. Investors and traders are often glued to these indicators. The markets get particularly volatile when information pertaining to these market indicators is released. Every type of market has its own set of indicators. Some indicators overlap […]

9334 What is a Financial Market

A market is a place where two parties are involved in transaction of goods and services in exchange of money. The two parties involved are: Buyer Seller In a market the buyer and seller comes on a common platform, where buyer purchases goods and services from the seller in exchange of money. What is a […]

Search with tags

  • No tags available.

Formula

The formula for this ratio can be easily judged by its name:

Operating Cash Flow to Sales Ratio = Operating Cash Flow / Sales

Meaning

  • Used Over a Period of Time: Conclusions must not be drawn based on a single number. A company may be able to convert its sales to cash for one year. But it is consistent, sustained record to do so that makes it more valuable.

  • Cash Flow Should Move In Direction And Proportion With Sales: If the sales are genuine, the cash flow will move more or less in correlation with the sales figure. The direction of movement and the quantum of change must be highly correlated with the sales figures.

Assumptions

  • Earnings Have Not Been Manipulated: As has been discussed many times before, earnings are subject to easy manipulation by the management. Thus if the management changes the policies from one year to another, then the numbers are just not comparable.

  • Cash Flow Has Not Been Manipulated: The total cash flow cannot be manipulated. However, companies have got innovative and have indeed shifted cash flow from financing and investing sections to the operating section. Thus analysts need to be wary of such accounting tricks at play to make the numbers look better than they are.

Interpretation

  • Are The Company’s Sales Genuine: The operating cash flow to sales ratio provides the analyst insight into the sales of the company. It is a known fact that companies can fudge the sales number relatively easily. This can be done by changing the revenue recognition policy which allows accountants to book future income as income today.

    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.

  • Compare With Days Sales Outstanding: The operating cash flow to sales ratio should also be somewhat in line with the days receivables outstanding ratio.

    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.

Article Written by

MSG Team

An insightful writer passionate about sharing expertise, trends, and tips, dedicated to inspiring and informing readers through engaging and thoughtful content.

Leave a reply

Your email address will not be published. Required fields are marked *

Related Articles

What are Common Size Statements ?

MSG Team

Cash Ratio – Meaning, Formula and Assumptions

MSG Team