![]() ![]() Due to revenue recognition policies and the matching principle, a company’s net income, or net earnings, can actually be materially different from its Cash Flow.Ĭompanies pay close attention to their CF and seek to manage it as carefully as possible. You may be wondering, “How is CF different from what’s reported on a company’s income statement?” Income and profit are based on accrual accounting principles, which smooths-out expenditures and matches revenues to the timing of when products/services are delivered. Investors and business operators care deeply about CF because it’s the lifeblood of a company. Capital Expenditures – CF can also be used to fund reinvestment and growth in the business.Dividend Payments – CF can be used to fund dividend payments to investors.Funding Gap – a measure of the shortfall a company has to overcome (how much more cash it needs).Cash Conversion Ratio – the amount of time between when a business pays for its inventory (cost of goods sold) and receives payment from its customers is the cash conversion ratio.P/CF Ratio – the price of a stock divided by the CFPS (see above), sometimes used as an alternative to the Price-Earnings, or P/E, ratio.Cash Flow Per Share (CFPS) – cash from operating activities divided by the number of shares outstanding.Cash Flow Yield – measuring how much cash a business generates per share, relative to its share price, expressed as a percentage.Liquidity – assessing how well a company can meet its short-term financial obligations.Internal Rate of Return – determining the IRR an investor achieves for making an investment.Net Present Value – calculating the value of a business by building a DCF Model and calculating the net present value ( NPV). ![]() The most common cash metrics and uses of CF are the following: ![]() In fact, it’s one of the most important metrics in all of finance and accounting. This is found at the bottom of the Cash Flow Statement.Ĭash Flow has many uses in both operating a business and in performing financial analysis.
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