The operating cash flow ratio is a liquidity ratio that measures how well a company can pay off its current liabilities with the cash flow generated from its core business operations. This ratio can help assess the short-term financial health and efficiency of a company.

The operating cash flow ratio is calculated by dividing the operating cash flow by the current liabilities. The operating cash flow is the amount of cash that a company produces from its normal business activities, such as selling goods and services, paying wages, and collecting payments. The current liabilities are the obligations that a company has to pay within one year or less, such as accounts payable, accrued expenses, and short-term loans.

The formula for the operating cash flow ratio is:

The operating cash flow ratio can be interpreted as follows:

• A ratio of more than 1 means that the company generates more cash from its operations than it needs to pay off its current liabilities. This indicates a high liquidity and a low risk of default.
• A ratio of less than 1 means that the company generates less cash from its operations than it needs to pay off its current liabilities. This indicates a low liquidity and a high risk of default.
• A ratio of 1 means that the company generates exactly enough cash from its operations to pay off its current liabilities. This indicates a moderate liquidity and a moderate risk of default.

Example of the Operating Cash Flow Ratio

Let’s look at an example of how to calculate and use the operating cash flow ratio. Suppose Company A and Company B are two competitors in the same industry. The following information is taken from their financial statements:

	Company A	Company B
Operating cash flow	$100,000	$50,000
Current liabilities	$80,000	$40,000

To calculate the operating cash flow ratio for each company, we use the formula:

For Company A, the ratio is:

Operating cash flow ratio = $100,000 / $80,000 = 1.25

For Company B, the ratio is:

Operating cash flow ratio = $50,000 / $40,000 = 1.25

Both companies have the same operating cash flow ratio of 1.25, which means that they can cover their current liabilities 1.25 times over with their operating cash flow. This suggests that both companies have a high liquidity and a low risk of default.

However, the operating cash flow ratio alone does not tell the whole story. We also need to consider other factors, such as the size, growth, profitability, and efficiency of the companies. For example, Company A has a higher operating cash flow and a higher current liabilities than Company B, which means that Company A has a larger and more leveraged business than Company B. Company A may also have a higher growth potential, a higher profit margin, or a higher asset turnover than Company B, which could explain why it has a higher operating cash flow and a higher current liabilities. Therefore, we need to compare the operating cash flow ratio with other financial ratios and indicators to get a more comprehensive picture of the financial performance and position of the companies.