How do cash flow statement ratios differ by industry?

1 Operating Cash Flow Ratio

The operating cash flow ratio (OCF ratio) is the ratio of cash flow from operations to current liabilities. It indicates how well a company can cover its short-term obligations with the cash generated from its core business activities. A higher OCF ratio means a higher liquidity and lower default risk. The OCF ratio can vary by industry depending on the operating cycle, the inventory turnover, the receivables collection, and the payables management. For example, a retail business may have a lower OCF ratio than a service business because it has more inventory and receivables, while a service business may have a higher OCF ratio because it has less inventory and receivables.

2 Cash Flow Margin Ratio

The cash flow margin ratio (CFM ratio) is the ratio of cash flow from operations to net sales. It measures how much cash a company generates from each dollar of sales. A higher CFM ratio means a higher profitability and efficiency. The CFM ratio can vary by industry depending on the profit margin, the depreciation and amortization, the working capital changes, and the non-cash expenses. For example, a manufacturing business may have a lower CFM ratio than a software business because it has more depreciation and amortization, more working capital changes, and more non-cash expenses, while a software business may have a higher CFM ratio because it has less depreciation and amortization, less working capital changes, and less non-cash expenses.

3 Free Cash Flow Ratio

The free cash flow ratio (FCF ratio) is the ratio of free cash flow to net income. It indicates how much cash a company has left after paying for its operating and investing activities. A higher FCF ratio means a higher solvency and growth potential. The FCF ratio can vary by industry depending on the capital expenditure, the acquisition and disposal of assets, the dividend policy, and the income quality. For example, a utility business may have a lower FCF ratio than a consulting business because it has more capital expenditure, more acquisition and disposal of assets, more dividend payments, and lower income quality, while a consulting business may have a higher FCF ratio because it has less capital expenditure, less acquisition and disposal of assets, less dividend payments, and higher income quality.

4 Cash Return on Assets Ratio

The cash return on assets ratio (CROA ratio) is the ratio of cash flow from operations to average total assets. It measures how efficiently a company uses its assets to generate cash flow. A higher CROA ratio means a higher asset utilization and return on investment. The CROA ratio can vary by industry depending on the asset turnover, the asset composition, the depreciation and amortization, and the non-cash expenses. For example, a restaurant business may have a lower CROA ratio than a pharmaceutical business because it has a lower asset turnover, more fixed assets, more depreciation and amortization, and more non-cash expenses, while a pharmaceutical business may have a higher CROA ratio because it has a higher asset turnover, less fixed assets, less depreciation and amortization, and less non-cash expenses.