Cash flow analysis

March 3, 2023

Cash flow analysis is an essential tool for assessing a company's liquidity and financial stability. It provides insights into the inflow and outflow of cash over a specific period, allowing companies to better understand their financial position and make more informed decisions.



The cash flow statement is one of the main financial statements used for cash flow analysis. It presents the inflows and outflows of cash and cash equivalents in three categories: operating activities, investing activities, and financing activities. The operating activities category includes cash inflows and outflows related to the company's core operations, such as revenue, expenses, and working capital. The investing activities category includes cash inflows and outflows related to the acquisition or disposal of long-term assets, such as property, plant, and equipment, as well as investments in securities. The financing activities category includes cash inflows and outflows related to raising and repaying capital, such as issuing and repurchasing stock and bonds.


To gain a deeper understanding of a company's cash flow and liquidity, cash flow analysis also involves the use of various financial ratios and metrics. These include:


  • Operating cash flow ratio: This ratio compares a company's operating cash flow to its current liabilities. A high ratio indicates that a company has sufficient cash flow to meet its short-term obligations.
  • Operating cash flow ratio = Operating cash flow / Current liabilities

  • Cash conversion cycle: This metric measures the time it takes for a company to convert its investments in inventory and accounts receivable into cash. A shorter cash conversion cycle is generally preferred, as it indicates that a company is able to generate cash more quickly.
  • Cash conversion cycle = Days inventory outstanding + Days sales outstanding - Days payable outstanding

  • Free cash flow: This metric measures the cash flow available to a company after accounting for capital expenditures required to maintain or expand its business. A positive free cash flow is generally considered a positive sign for a company, as it indicates that it has excess cash to invest in growth or return to shareholders.
  • Free cash flow = Operating cash flow - Capital expenditures

  • Debt coverage ratio: This ratio compares a company's operating cash flow to its total debt. A high ratio indicates that a company has sufficient cash flow to meet its debt obligations.
  • Debt coverage ratio = Operating cash flow / Total debt

In addition to these ratios and metrics, cash flow analysis also involves forecasting future cash flows through the use of cash flow projections. One common method for generating cash flow projections is the direct method, which involves forecasting cash inflows and outflows for each category of the cash flow statement.


Cash flow analysis is essential for assessing a company's financial health and liquidity, and it plays a critical role in risk management. By analyzing a company's cash flow and forecasting future cash flows, companies can make more informed decisions about investments, financing, and operating strategies.

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