Cash Flow to Sales

Managers accustomed to assessing the income statements generally focus on the bottom line results. While the level of cash at the bottom of the statement of cash flows is certainly an important consideration, such information could be obtained from the balance sheet.  The focal point of cash flow analysis is on cash inflows and outflows from operation activities. These cash flows are used in ratios that measure cash generating efficiency, which is a firm’s ability to make cash from its current or continuing operations. The ratios that analysts use to compute cash generating efficiency are the cash flows to sales, cash flows to assets and cash flow yield.

Cash flow to sales Ratio is an indicator of the financial strength of the company. This ratio looks at sales in relation to the cash flow. The higher the value of Cash flow to sales ratio, the stronger the business organization

Formula  for calculating Cash flow to sales ratio is sales per share divided by the cash flow per share ( or equivalently, total sales divided by total cash flow).

From this example let us compute these ratios for Marriot in 2005 using the following information from the Marriot 2005 annual report. (All dollar amounts are in millions). Net cash flows from operating activities is 837.

Calculation Of Cash flow To Sales

Cash Flows to Sales are the ratio of the net cash flows from operating activities to sales:

Cash flow to sales = Net cash flows from operating activities / sales

= 837/11550 = 7.2 percent

Thus the Marriot generated positive cash flows to sales of 7.2 percent in 2005

Questionnaire:

• What is Cash Flow to Sales?
• How to Calculate Cash Flow To Sales. Give an example.