13 Cash Flow Metrics & What They Mean (+ Formulas)

Cash Flow is the lifeblood of any business, small or large, new or established. It's the financial fuel that keeps the operations running, and without it, even the most innovative enterprise can come to a grinding halt. 

At Wisesheets, we're going to break down these cash flow metrics, distinguish them from cash flow KPIs, and tell you why scenario analysis is super important.

Ready? Let's go.

What Are Cash Flow Metrics?

For an investor, cash flow metrics are like a financial compass; they provide valuable insights into a company's financial health, helping navigate investment decisions. 

We all know there are both risks and rewards of investing, therefore calculated decisions are also the lucrative ones. These metrics are fundamental in evaluating a company's ability to generate cash, meet obligations, and maintain its operations, all of which impact the return on an investment.

There are many cash flow metrics you might consider, and in this guide, we’re going to cover the following:

1. Operating Cash Flow (OCF): Measures cash generated from core business operations. It is calculated as net income + non-cash expenses + changes in working capital.
2. Working Capital: Represents a company's operational liquidity. It is calculated as current assets – current liabilities.
3. Forecast Variance: Measures the difference between projected and actual cash flow. It is calculated as forecasted cash flow – actual cash flow.
4. Days Sales Outstanding (DSO): Measures the average number of days a company takes to collect payment after a sale. It is calculated as (Accounts Receivable / Total Credit Sales) x number of days.
5. Days Payable Outstanding (DPO): Quantifies how long a company takes to pay its bills. It is calculated as (Accounts Payable / Cost of Goods Sold) x number of days.
6. Current Ratio: Measures a company's ability to cover its short-term liabilities with its short-term assets. It is calculated as current assets / current liabilities.
7. Return on Equity (ROE): Measures the profitability of a company in relation to their investment (shareholder’s equity). It is calculated as net income / shareholder's equity.
8. Cash Flow from Operations (CFO): Indicates the amount of cash a company generates from its core business operations. It is calculated as net income + non-cash expenses + changes in working capital.
9. Free Cash Flow (FCF): Represents the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets. It is calculated as cash flow from operations – capital expenditures.
10. Cash Flow Coverage Ratio: Measures a company's ability to pay off its obligations with its operational cash flow. It is calculated as cash flow from operations / total debt.
11. Cash Conversion Cycle (CCC): Measures how efficiently a company manages its working capital. It is calculated as Days Sales of Inventory (DSI) + DSO – DPO.
12. Liquidity Ratio: Measures a company's ability to cover its short-term debts with its most liquid assets. It is calculated as most liquid assets / current liabilities.
13. Sustainable Growth Rate (SGR): Measures the maximum growth rate that a company can achieve without resorting to additional financial leverage. It is calculated as return on equity (ROE) x (1 – dividend payout ratio).

Cash Flow Metrics vs. Cash Flow KPIs

If you want to assess a company’s financial health, then you need to know the difference between cash flow metrics and cash flow KPIs. While interconnected, they serve different purposes:

1. Cash flow metrics are broad financial measures showcasing a company's liquidity and cash generation ability – think operating, investing, and financing cash flow.
2. Cash flow KPIs, however, are specific indicators derived from these metrics. They're tailored to align with a company's strategic goals and provide a measure of performance over time. An example might be the 'cash conversion cycle' that monitors efficiency in converting resources to cash.

In short, metrics give you the cash flow landscape, while KPIs measure performance against objectives within that landscape. Both are essential for understanding a company's financial health.

Why Cash Flow Scenario Analysis Is Important

Think of cash flow scenario analysis as your financial crystal ball. It lets you play out "what if" situations to see how different factors, like sales ups and downs or unexpected costs, might affect your cash flow. Imagine knowing beforehand what could happen and having a plan ready!

Maybe one scenario shows cash getting a bit tight – with this heads up, you can sort out strategies to avoid trouble. Or perhaps there's an unexpected cash bonus – great! You can decide whether to invest in new opportunities, pay off debts, or something else. 

How Do You Measure Cash Flow?

Measuring cash flow can be broken down into three main types, each telling a unique part of your business's financial story. Here's how it's done:

• Operating Cash Flow (OCF): This is the cash generated from your day-to-day business operations – your main income generators. You calculate it by taking your net income, adding back in non-cash expenses like depreciation and adjustments for changes in working capital.
• Investing Cash Flow: This shows the cash used or generated from investing activities like buying or selling assets (think property or equipment). To calculate it, you'd subtract the money spent on investments from the money received from selling off assets.
• Financing Cash Flow: This is all about the cash exchanged between your business and its owners or creditors. It includes things like issuing stocks, paying dividends, or borrowing money. You get this number by taking the cash received from issuing debt or equity and subtracting payments like dividends and loan repayments.

By measuring these different types of cash flows, you can get a well-rounded view of how money is moving in, out, and around your business.

1. Operating Cash Flow

Operating Cash Flow, often seen as the backbone of a company's financial health, represents cash generated from core business operations. It's the cash inflow that keeps the business engine running day-to-day, exclusive of interest or investment income. A strong OCF signals a company's potential to thrive independently, without needing additional external financing.

How to Calculate OCF

To compute OCF, you start with net income, add back non-cash expenses (like depreciation), and adjust for changes in working capital. 

Here's the formula:

Operating Cash Flow = Net income + Non-Cash Expenses + Change in Working Capital

Automatic Calculation (Excel and Google Sheets)

Using the Wisesheets add-on, you can calculate this metric like this:

=WISE("ticker", "operating cash flow", period)

As you can see, this will return the operating cash flow for any company automatically on a quarterly, annual, and TTM (Trailing Twelve Months) basis.

Interpreting OCF Values

Let's consider a tech startup, which reported:

• Net income: $4,000
• Depreciation: $10,000
• Increase in accounts receivable: -$3,000
• Decrease in accounts payable: -$2,000

Its OCF = $4,000 + $10,000 – $3,000 – $2,000 = $9,000. This positive OCF implies that the startup is doing well, generating enough cash through its operations to sustain itself.

Pro Tip: Operating Cash Flow (OCF) is a crucial part of understanding a company's financial health, but don’t forget to pay attention to the ROIC and ROA, which tell how effectively a company is using its resources to generate profit. In fact, OCF is often closely related to these metrics as they all speak to a company's operational efficiency and profitability.

2. Working Capital

Working capital represents a company's operational liquidity – the short-term assets available to cover immediate obligations. It's an essential metric in assessing the financial health of a company, indicating whether it has sufficient cash flow to meet short-term liabilities.

How to Calculate Working Capital

The calculation is straightforward: subtract current liabilities from current assets. Here's the formula:

Working Capital = Current Assets – Current Liabilities

Automatic Calculation (Excel and Google Sheets)

Using the Wisesheets add-on, you can calculate this metric like this:

=WISE("ticker", "working capital", period)

As you can see, this will return the working capital for any company automatically on a quarterly, annual, and TTM (Trailing Twelve Months) basis.

Interpreting Working Capital Values

1. Suppose a boutique clothing company reported:
2. Current Assets: $50,000
3. Current Liabilities: $30,000

Its Working Capital = $50,000 – $30,000 = $20,000. A positive value suggests the company can comfortably cover its short-term debts, which signals good financial health.

Related: How to Calculate Market Value of Debt for Stocks

3. Forecast Variance

Forecast Variance measures the difference between projected and actual cash flow. It helps investors understand how well the company manages its forecasts and if there may be systemic issues with over- or under-estimation. A lower forecast variance indicates better accuracy in financial forecasting, suggesting competent management, which is a positive signal to investors.

How to Calculate Forecast Variance

Calculation: Forecast Variance = Forecasted Cash Flow – Actual Cash Flow

Interpreting the Forecast Variance

Investors value Forecast Variance as it shows the accuracy of a company's financial predictions. Consistent, minimal variance suggests efficient planning and execution, while large variances may hint at forecasting issues or operational problems.

4. Days Sales Outstanding (DSO)

DSO measures the average number of days a company takes to collect payment after a sale. If DSO is decreasing or lower than industry standards, it may indicate efficient collection processes, suggesting the company has a strong grip on its credit control, which is favorable for investors.

How to Calculate DSO

DSO = (Accounts Receivable / Total Credit Sales) x Number of Days

Automatic Calculation (Excel and Google Sheets)

Using the Wisesheets add-on, you can calculate this metric like this:

=WISE("ticker", "days sales outstanding", period)

As you can see, this will return the days sales outstanding for any company automatically on a quarterly, annual, and TTM (Trailing Twelve Months) basis.

Interpreting the DSO

DSO gives investors insight into a company's credit and collection efficiency. A lower DSO is usually preferable, suggesting the company is quick at converting credit sales into cash, a sign of good financial health.

5. Days Payable Outstanding (DPO)

DPO quantifies how long a company takes to pay its bills. A higher DPO could mean the company is effectively using its suppliers to finance operations, thus preserving its cash. However, a DPO much higher than industry norms could suggest potential payment issues, which could be a red flag for investors.

How to Calculate DPO

Calculation: DPO = (Accounts Payable / Cost of Goods Sold) x Number of Days

Automatic Calculation (Excel and Google Sheets)

Using the Wisesheets add-on, you can calculate this metric like this:

=WISE("ticker", "Days Payables Outstanding", period)

As you can see, this will return the days payables outstanding for any company automatically on a quarterly, annual, and TTM (Trailing Twelve Months) basis.

Interpreting the DPO

DPO reflects how long a company holds onto its cash before paying suppliers. A higher DPO could be beneficial for the company's cash position, but if it significantly exceeds industry norms, it may indicate potential issues with supplier relationships or financial health.

6. Current Ratio

The Current Ratio measures a company's ability to cover its short-term liabilities with its short-term assets. A ratio above 1 indicates financial stability and that the company can comfortably meet short-term obligations, which reduces investor risk.

How to Calculate Current Ratio

Current Ratio = Current Assets / Current Liabilities

Automatic Calculation (Excel and Google Sheets)

Using the Wisesheets add-on, you can calculate this metric like this:

=WISE("ticker", "current ratio", period)

As you can see, this will return the current ratio for any company automatically on a quarterly, annual, and TTM (Trailing Twelve Months) basis.

Interpreting the Current Ratio

The Current Ratio tells investors about a company's liquidity. A ratio greater than 1 implies that the company can pay its short-term obligations, suggesting financial stability and lowering investment risk.

7. Return on Equity (ROE)

ROE is crucial for investors as it measures the profitability of a company in relation to their investment (shareholder’s equity). A higher ROE implies that the company is using its invested capital effectively to generate profits, indicating a good return potential for investors.

How to Calculate ROE

Calculation: ROE = Net Income / Shareholder's Equity

Automatic Calculation (Excel and Google Sheets)

Using the Wisesheets add-on, you can calculate this metric like this:

=WISE("ticker", "roe", period)

As you can see, this will return the return on equity for any company automatically on a quarterly, annual, and TTM (Trailing Twelve Months) basis.

Interpreting the ROE

ROE is a critical measure for investors as it reveals how effectively a company uses investors' funds to generate profits. A higher ROE implies better financial efficiency and potential for profitable returns, which is attractive to investors.

8. Cash Flow from Operations (CFO)

CFO is an essential cash flow metric indicating the amount of cash a company generates from its core business operations. This excludes cash from investments and financing activities. It provides a clear picture of a company's ability to generate cash simply from doing its core business. For investors, a consistent and growing CFO signals a company's strong financial health and its potential for long-term success.

How to Calculate CFO

The CFO is calculated from the company's net income, adjusted for non-cash items (like depreciation) and changes in working capital. 

Here's the calculation: 

CFO = Net Income + Non-Cash Expenses + Changes in Working Capital

Interpreting the CFO

CFO offers investors an honest view of the company's operational profitability. A strong, positive CFO means the company can finance its operations and potential growth using its internal resources, reducing its reliance on external funding. Therefore, a higher CFO is usually attractive to investors, signifying strong financial health and operational efficiency.

9. Free Cash Flow (FCF)

FCF is a vital metric for investors, as it represents the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets. Unlike earnings or net income, free cash flow is a measure of profitability that excludes the non-cash expenses of the income statement and includes spending on equipment and assets.

How to Calculate FCF

FCF can be calculated by subtracting capital expenditures from cash flow from operations. 

Here's the calculation: FCF = Cash Flow from Operations – Capital Expenditures

Automatic Calculation (Excel and Google Sheets)

Using the Wisesheets add-on, you can calculate this metric like this:

=WISE("ticker", "free cash flow", period)

As you can see, this will return the free cash flow for any company automatically on a quarterly, annual, and TTM (Trailing Twelve Months) basis.

Interpreting the FCF

For investors, FCF is a crucial indicator of a company's financial flexibility and shows how much cash is available for reinvestment back into the business, paying down debt, or returning to shareholders. A positive FCF is a good sign for investors as it suggests that the company has enough cash to fund its operational activities and growth.

On the other hand, a negative FCF could suggest that the company is not generating enough cash from its operations and might be relying heavily on external financing.

10. Cash Flow Coverage Ratio

The Cash Flow Coverage Ratio is an essential metric for investors, as it measures a company's ability to pay off its obligations with its operational cash flow. Higher ratios indicate that the company is generating more than enough cash from its operations to pay off its debts, which is an encouraging sign for investors.

How to Calculate Cash Flow Coverage Ratio

The Cash Flow Coverage Ratio can be calculated by dividing the cash flow from operations by total debt. 

Here's the calculation: 

Cash Flow Coverage Ratio = Cash Flow from Operations / Total Debt

Interpreting the Cash Flow Coverage Ratio

For investors, a higher Cash Flow Coverage Ratio is generally more favorable as it indicates the company has a robust financial condition with enough cash to cover its obligations.

Lower ratios, on the other hand, may imply that the company is struggling to generate enough cash from its operations to meet its debt obligations, which could be a red flag for investors. The ideal ratio can vary based on industry standards and the company's unique financial situation.

11. Cash Conversion Cycle

The Cash Conversion Cycle (CCC) is a crucial metric for investors as it measures how efficiently a company manages its working capital. It represents the time (in days) it takes for a company to convert its investments in inventory and other resources into cash flows from sales.

How to Calculate Cash Conversion Cycle

The CCC is calculated by adding the Days Sales of Inventory (DSI) and Days Sales Outstanding (DSO) and then subtracting the Days Payable Outstanding (DPO).

Here's the calculation: CCC = DSI + DSO – DPO

Interpreting the Cash Conversion Cycle

For investors, a shorter CCC is typically more desirable, as it suggests the company efficiently turns its inventory into cash. Conversely, a longer CCC could indicate that the company is tied up in inventory or receivables for too long, affecting cash flow.

It's important to compare the CCC with industry standards to understand if the company is performing well. This metric is especially important for businesses that rely heavily on inventory management, such as retail or manufacturing firms.

12. Liquidity Ratio

The Liquidity Ratio is an important metric for investors, as it measures a company's ability to cover its short-term debts with its most liquid assets. High liquidity ratios indicate that the company is well-positioned to pay off its current liabilities, which is a reassuring sign for investors.

How to Calculate Liquidity Ratio

The Liquidity Ratio can be calculated by dividing a company's most liquid assets (usually cash and cash equivalents) by its current liabilities. 

Here's the calculation: Liquidity Ratio = Most Liquid Assets / Current Liabilities

Interpreting the Liquidity Ratio

A higher Liquidity Ratio is generally more favorable for investors as it suggests the company can comfortably meet its short-term debt obligations even in the event of unexpected expenses or a downturn in business.

However, an extremely high ratio may also indicate that the company is not using its assets efficiently to generate profits. Comparing a company's Liquidity Ratio with those of other firms in the same industry can provide valuable context.

13. Sustainable Growth Rate (SGR)

The Sustainable Growth Rate (SGR) is a valuable metric for investors. It measures the maximum growth rate that a company can achieve without resorting to additional financial leverage. A company's SGR represents a balanced point where the business maintains its financial ratios, ensuring steady, self-financed growth.

How to Calculate Sustainable Growth Rate

SGR can be calculated by multiplying the company's return on equity (ROE) by its retention ratio (1 – dividend payout ratio).

Here's the calculation: SGR = ROE x (1 – Dividend Payout Ratio)

Interpreting the Sustainable Growth Rate

Investors use SGR to evaluate a company's growth potential. A high SGR is generally positive, suggesting the company has a promising future and can grow while maintaining its current financial structure.

However, it's crucial to remember that this is a theoretical rate. If a company's actual growth rate is significantly higher than its SGR, it may be overextending itself, which could lead to financial instability in the long run. Hence, SGR should always be evaluated in the context of the company's actual growth and industry standards.

How to Pick the Right Cash Flow KPIs for Your Organization

• Understand your business model: If you're an investor in a retail company, you might focus on inventory turnover rates, as these directly affect the cash flow in retail businesses. In contrast, for a service-based business like a consultancy firm, receivables turnover might be more important because cash flow is heavily reliant on how quickly the firm collects payments from clients.
• Define your financial goals: If your investment goal is to maximize returns, you might look at KPIs like Return on Investment (ROI) and Return on Equity (ROE). If you're more concerned about financial stability, you may focus on KPIs that indicate solvency, like the liquidity ratio or the cash flow coverage ratio.
• Consider stakeholder interests: If you're an investor who is also a shareholder, profitability ratios such as net profit margin or operating margin can be important KPIs. On the other hand, if you're a lender, you might be more interested in the company's ability to pay its debts, so liquidity ratios like the current ratio or quick ratio would be more relevant.
• Keep it simple: Instead of tracking numerous KPIs, focus on a few that are most pertinent to your investment goals. For instance, if you're investing in a startup, you might prioritize cash burn rate and runway over other KPIs.
• Be flexible and adaptable: As the company evolves and economic conditions change, different KPIs may become more or less important. For instance, during an economic downturn, you might start paying more attention to liquidity and solvency ratios, while in boom periods, growth ratios may take precedence.

The key is to select the cash flow KPIs that best align with your investment strategy, risk tolerance, and the specific nature of the business you're investing in.

Pro Tip: Skip the Cash Flow Metric Calculations with Wisesheets

All in all, as an investor, understanding and analyzing cash flow metrics is key to making sound investment decisions. The task, however, can be daunting due to the vast amounts of data and calculations involved. This is where Wisesheets comes into play.

Here's how Wisesheets could be invaluable to investors, particularly in relation to cash flow metrics:

1. Automated Data Extraction: Wisesheets eliminates the need to manually copy and paste financial data for each company into spreadsheets. It pulls live data from financial statements, balance sheets, and stock prices, saving you precious time and reducing the risk of errors.
2. Customized Models: Wisesheets allows investors to build custom models, enabling them to focus on the cash flow metrics most relevant to their investment strategies. Whether it's Operating Cash Flow, Free Cash Flow, or Cash Conversion Cycle, you can cherry-pick the data you need.
3. Industry Comparisons: By automating data collection, Wisesheets makes it easier to compare a company's cash flow metrics against industry peers, providing invaluable context for your investment decisions.
4. Ease of Use: Wisesheets integrates with Excel and Google Sheets, two platforms many investors are already familiar with, making it a convenient and user-friendly tool.

In essence, Wisesheets is a powerful resource for investors looking to dive deep into cash flow metrics. It streamlines and simplifies the process of data collection, calculation, and analysis, helping you make more informed and confident investment decisions.