The Financial Life Cycle
A lot of young people are not aware of what their financial goals ideally should be. Most of them fall into the habit of trading time for money. This contract wherein one person trades their time, money, and effort for an income is called employment and is generally viewed upon favorably by the world. It […]
What is Job Order Costing?
In earlier time, prices used to be driven by costs. This meant that the firms would consider the amount of money that they had spent in manufacturing a product. They would add a profit margin to it and then sell it at this “cost plus” price. This system had some issues. Even if the company […]
Types of Covenants
In the previous article, we had a closer look at the concept of covenants as well as indentures. However, we only covered the basics. Indentures and covenants are extremely important to the investors who deploy their money in fixed-income securities. It is for this reason that investors need to have a better understanding of the […]
Finance Functions – Investment, Financial, Dividend and Liquidity Decisions
The following explanation will help in understanding each finance function in detail Investment Decision One of the most important finance functions is to intelligently allocate capital to long term assets. This activity is also known as capital budgeting. It is important to allocate capital in those long term assets so as to get maximum yield […]
The Twitter Story
The mega-success of social media sites is not news for anyone. Social media companies such as Facebook and Instagram have become global behemoths within a small period of time. These companies also have multi-billion dollar revenues and cash flows which reinforces their position in the market. Twitter is another social media company that is often […]
Cash Flow to Debt Ratio = Operating Cash Flow/Total Debt
The cash flow to debt ratio tells investors how much cash flow the company generated from its regular operating activities compared to the total debt it has. For instance if the ratio is 0.25, then the operating cash flow was one fourth of the total debt the company has on its books. This debt includes interest payments, principal payments and even lease payments to cover off balance sheet financing.
However, this may not be the case. Companies have access to a variety of financing schemes. Some of these schemes include interest only payments, bullet payments, balloon payments, negative amortization, so on and so forth. In such innovative amortization, there may be years when the company has to pay a lot of interest and other years when it has to pay none. Hence the present years figures may not be indicative of the future.
Earlier analysis used earnings because at that time credit periods were small or nonexistent and therefore earnings to some extent meant cash flow. However, with the proliferation of credit, the distinction has been widened.
A company may book earnings immediately and not receive cash for years on end. Thus creditors have their eyes set on cash flow ratios.
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