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Cash Flow To Net Income Ratio Formula:
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The Cash Flow to Net Income Ratio measures the relationship between a company's operating cash flow and its net income. It indicates how well net income is supported by actual cash flows from operations, providing insight into earnings quality.
The calculator uses the Cash Flow to Net Income Ratio formula:
Where:
Explanation: This ratio compares the cash generated from operations to the accounting profit, helping assess the quality of earnings and cash flow sustainability.
Details: A ratio greater than 1 indicates strong cash flow generation relative to reported earnings, suggesting high-quality earnings. A ratio less than 1 may indicate potential earnings quality issues or aggressive accounting practices.
Tips: Enter operating cash flow and net income in USD. Both values must be positive numbers. The result is expressed as a dimensionless ratio.
Q1: What is a good Cash Flow to Net Income Ratio?
A: Generally, a ratio above 1 is considered good, indicating that cash flow from operations exceeds net income. However, industry norms vary significantly.
Q2: Why might the ratio be less than 1?
A: This can occur due to non-cash revenues, aggressive revenue recognition, significant accounts receivable growth, or timing differences between cash collection and revenue recognition.
Q3: How does this ratio differ from the cash flow margin?
A: Cash flow to net income ratio compares operating cash flow to net income, while cash flow margin compares operating cash flow to revenue.
Q4: What are the limitations of this ratio?
A: The ratio can be influenced by one-time items, changes in working capital, and differences in accounting methods between companies.
Q5: How often should this ratio be calculated?
A: It should be calculated quarterly and annually to track trends in earnings quality and cash flow consistency over time.