Cash Flow on Total Assets Ratio
Cash flow on total assets ratio is the tool to measure the amount of cash flow a company made compare to the total assets. It is not related to the profit or loss that company makes. It is purely related to cash inflow to the company.
Company assets are the resources that own and controlled by the company. They are the capital that investors have invested plus the amount company owes to others creditors. The amount of cash company generates reflects how good they are in using its assets to generate cash.
A cash flow statement is a financial document that shows how much cash a business has generated or used over a certain period of time. The statement can be used to assess the company’s financial health and identify any potential liquidity problems. The cash flow statement can also be helpful in forecasting future cash needs. There are three main sections to a cash flow statement: operating activities, investing activities, and financing activities.
A company’s cash flow from operating activities is the amount of cash that it generates from its normal business activities. This includes cash generated from sales, as well as any other cash inflow that results from the company’s day-to-day operations. Cash flow from operating activities can be a good indicator of a company’s overall financial health, as it shows how much cash the company is generating on a regular basis.
Total assets refer to the average asset between two account periods. Total assets are all the assets that a business has at a particular time. To calculate total assets, you take the average of all the assets between two account periods. This number can be useful for businesses to track their progress over time.
Cash Flow on Total Assets Ratio Formula
| \[Cash\ Flow\ on\ Total\ Assets = {Cash\ Flow\ from\ Operations \over Average\ Total\ Assets}\] |
- Cash flow from operations: is the net cash flow from operating activities in the statement of cash flow.
- Average Total Assets: is the average of total assets between two accounting periods.
Analysis
Cash flow to total assets ratio measures the ability of the company to use its own assets to generate cash flow. The cash flow is the net between cash inflow and cash outflow from the company’s main business activities.
The more cash flow company generate, it means the more efficient company use asset. It can help prevent the company from liquidation as they have enough money to pay for the supplier, employee, and other liabilities.
A lower ratio shows that company is not using all of its assets’ potential to generate cash flow. Moreover, they will face a higher risk if the cash flow generates from the operation is not enough to cover other expenses and liabilities. The company will need to seek other sources of funds to support its operation and prevent liquidation.
Advantage
- Cash flow: the ratio base on the cash flow rather than the earing. The cash flow statement shows how much cash is coming in and going out of a company during a specific period of time. While the income statement focuses on earnings, the cash flow statement provides a more accurate picture of a company’s financial health because it includes both revenue and expenses.
- Easy to compare with industry: it allows the company to compare the ratio from one company to another across the industry average. It is easy to see how your company measures up against the competition. There are a few key indicators that can help you get a snapshot of where you stand in relation to others in your industry.
- To evaluate the company’s financial health: It allows the investors or creditors to access the company’s financial health. It measures if the company is able to generate enough cash from the invested assets.
Disadvantage
- Ignore the income statement: The ratio is based on the cash flow only, it ignores the company net profit or loss on the income statement. It may mislead the users.
- Based on the past data: The cash flow from operating activity arises from the past, it may not reflect future performance.
- Not provide good or bad rating: The ratio does not provide a guideline that determines the good or bad rating.