Financial Statements offer a wealth of information about the assets, liabilities

Question

Financial Statements offer a wealth of information about the assets, liabilities, and, with the income and expenses of a firm... Business uses 'ratios' as a key measure of 'how/what' is transpiring with regard to the movement of the items within a financial statement...

Measuring ratio within a financial statement, your job is to offer a 'new' ratio.. And, tell us 'what' the ratio tells senior management or investors of the firm, and, 'why' this ratio might be improved (meaning 'which way'...up or down is a 'better' direction for the ratio)?

Explanation / Answer

A new ratio that may be explored is the Operating Cash Flow to Sales ratio. This takes two items from two financial statements. It takes net Sales from Income Statement and Cash flow from Operating Activities from CAsh flow statement.

The ratio is expresses as CAsh flow from operating Activities/Net Sales.

This ratio indicates the extent of actual acsh generation from operating activities in relation to the Sales revenue reported. As the numerator deals with cash generation , it tells about the loquidity position of the company and the trend in liquidity situation in different years.

The higher the ratio , the better as it will indicate higher portion of reported sales has been converted into liquid cash for the business and profitability and working capital management of the firm is showing good results.

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