Advantages and Disadvantages of Forex Market
Advantages of Forex Market The biggest financial market in the world is the biggest market because it provides some advantages to its participants. Some of the major advantages offered are as follows: Flexibility Forex exchange markets provide traders with a lot of flexibility. This is because there is no restriction on the amount of money […]
How Do Pension Funds Influence Economic Growth?
Pension funds have witnessed a dramatic increase in the number of assets that they control. This increase has been the result of an ever-increasing workforce that has been diligently contributing to their financial future. The funds being managed by pension funds have increased both in developed as well as developing nations. Many developing nations are […]
Challenges to Investment Banking Business
Investment banking has traditionally been a lucrative business. Investment bankers have always been in the news for the excessive amount of money that they made while the rest of the world was struggling. However, the relentless negative publicity that the industry has received in the past has changed the way it functions. Also, external circumstances […]
Dividend Discount Model: Gordon Growth Rate
In the previous article, we became aware that the value of a stock can be split into two parts. One part is the horizon period i.e. the period chosen by the analyst for which they believe they can accurately forecast the financials of the company and therefore its dividends. This part remains the same when […]
Ratio Analysis in Personal Finance
Ratio analysis is considered to be very important when it comes to making financial investments. There are many retail investors who know the value of retail investments. As a result, they also routinely perform a ratio analysis for companies that they invest in. However, surprisingly, a lot of these analysts do not perform a ratio […]
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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