Consider the example of company X which has Rs. 10,00,000 operating cash and the net sales revenue is Rs. 75,00,000. Therefore, the operating cash flow margin is,
= 10, 00,000/75,00,000= 0.133
This means that every Re. 1 of sales is given to Rs. 0.133 of cash flow which is used to pay expenses and salaries, distribute shareholder dividends and purchasing assets.
The operating cash flow is obtained from the cash flow statement and sales revenue from the income statement.
If the ratio falls, it means that the sales revenue growth is not being reflected in its cash flow (i.e. operational activities/ working capital). From this decreasing ratio, it could be interpreted that
• There is less efficiency in managing its receivables i.e. cash is not being collected promptly from the debtors
• The accounts payable are not being settled in a timely fashion for the received goods/ services
• There is higher risk for the company to not pay its obligations. The share price would fall accordingly
Therefore, higher the operating cash flow margin, the better.
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