You may be wondering, “How is CF different from what’s reported on a company’s income statement?” Income and profit are based on accrual accounting principles, which smooths-out expenditures and matches revenues to the timing of when products/services are delivered. Investors and business operators care deeply about CF because it’s the lifeblood of a company. Capital Expenditures – CF can also be used to fund reinvestment and growth in the business.Dividend Payments – CF can be used to fund dividend payments to investors.Funding Gap – a measure of the shortfall a company has to overcome (how much more cash it needs).Cash Conversion Ratio – the amount of time between when a business pays for its inventory (cost of goods sold) and receives payment from its customers is the cash conversion ratio.P/CF Ratio – the price of a stock divided by the CFPS (see above), sometimes used as an alternative to the Price-Earnings, or P/E, ratio.Cash Flow Per Share (CFPS) – cash from operating activities divided by the number of shares outstanding.Cash Flow Yield – measuring how much cash a business generates per share, relative to its share price, expressed as a percentage.Liquidity – assessing how well a company can meet its short-term financial obligations.Internal Rate of Return – determining the IRR an investor achieves for making an investment.Net Present Value – calculating the value of a business by building a DCF Model and calculating the net present value ( NPV).The most common cash metrics and uses of CF are the following: In fact, it’s one of the most important metrics in all of finance and accounting. This is found at the bottom of the Cash Flow Statement.Ĭash Flow has many uses in both operating a business and in performing financial analysis. Net Change in Cash – The change in the amount of cash flow from one accounting period to the next.It is used in financial modeling and valuation. #Cash flow definition free
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