What is Cash Flow to Debt Ratio?

The cash flow to debt ratio measures a company’s operating cash flow versus its total debt. It is a useful tool for measuring a company’s ‘coverage,’ which looks at how well equipped a company is to meet its ongoing debt obligations (interest payments, for example) based on the amount of cash it generates through sales/service. There are different methodologies for calculating the ratio, but the most conservative are using free cash flow as the numerator and all redeemable debt (short-term, long-term, preferred stock) as the denominator. Continue reading...

What is Cash Flow-to-Debt Ratio?

Comparing operating cash flow to the size of a company’s debt obligations can give investors and analysts an idea of how capable a company is of paying of its debts. This ratio compares the size of a company’s cash flow from operations to the size of its debt, in an effort to get an idea of how capable a company is of paying off its debt obligations, and how long it would take if all cash flow were diverted to debt service. Continue reading...

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What is the Operating Cash Flow Ratio?

The operating cash flow ratio, or OCF ratio, is used to measure whether a company’s cash flows are sufficient to cover current liabilities. It essentially measures how many times a company can use cash flow from operations to cover debt expenses. It can be measured by dividing a company’s cash flow from operations by its current liabilities. Companies with high (relative to their peers or other companies in the sector OCF ratios are generally in good financial health, meaning they can adequately cover ongoing liabilities with cash flow from operations. Continue reading...

What is the Price to Cash Flow Ratio (PCFR)?

The Price to Cash Flow Ratio (PCFR) is a valuation measure that looks at a company’s stock price relative to its cash flow per share. Generally speaking, the lower the ratio, the better chance the company is undervalued - it basically means the company produces a lot of cash flow relative to how much it costs to acquire a share on the open market. A very high PCFR indicates that a company is trading at a high price relative to the amount of cash flow it produces. Start-up technology companies, for instance, would generally have high PCFRs because they may not produce high levels of cash flow in early stages, but investors may bid up the price in anticipation of future growth. Continue reading...

What is Cash-Flow Financing?

Cash flow financing is an alternative method of securing a loan, in which cash flows are the collateral, not assets. In cash flow financing, also known as cash flow loans, a lending institution will base their decisions regarding the size of the loan and the loan repayment schedule on future expected cash flows of the company. The cash flows serve as collateral instead of assets, as in an asset-backed loan. Continue reading...

What is a Cash Flow Statement?

A statement of cash flows is an accounting report which describes the changes in cash flows, which is distinct from net income. Cash Flow Statements are an important part of corporate accounting. While net income reports include non-cash items such as depreciation, as well as accounts receivable and accounts payable, cash flow statements will isolate the cash transactions in and out of the company. This helps get an idea of whether the company can pay its bills in a timely manner and so forth. Continue reading...

What is Discounted Cash Flow?

Discounted Cash Flow (DCF) uses an estimated future cash flow amount and a Discount Rate to determine the Present Value (PV). An investor or business executive might project an estimated future cash flow for a business based on recent growth rates, industry information, futurism, estimated inflation, etc. The most common future cash flow to use is free cash flow, which takes out capital expenditures. Continue reading...

What is Cash Flow?

Cash flow is the liquid flow of cash and cash equivalents into and out of a business. Cash flow is an accounting metric that keeps track of the liquid assets going into and out of a business, project, or fund. Cash flow does not include accounts receivable, necessarily, because those funds may not be in-hand at the present time. The cash conversion cycle (CCC) and some valuation calculations will use cash flow numbers. Accounts may demonstrate positive or negative cash flow, which is either adding to or decreasing total assets. Continue reading...

What is the Difference Between a Growth and Value Stock?

Growth stocks tend to be younger companies focused on using capital to fuel more growth, whereas Value stocks have perceived safety through consistent earnings, cash on balance sheets, and dividends. Neither growth nor value stocks are the best performers for all time, and the reality is that over long stretches of time, performance tends to revert to the mean. Categorically, growth stocks tend to be younger companies that focus capital on investing in expanding operations - hiring new personnel, hiring more employees, entering new markets. Continue reading...

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What is the Gearing Ratio?

In mechanics, gears are used to increase torque and to translate the force to other areas. In finance, a gearing ratio is a term referring the amount leverage being used, compared to the amount of equity. A high gearing ratio is almost the same as a high debt-to-equity ratio. The gearing ratio is computed in a slightly different manner. Gearing is another word for leverage. High amounts of debt can spell trouble for a company down the road, and investors are wise to consider that. Continue reading...

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What is Cash Flow from Investing Activities?

In the Cash Flow Statement, the cash flow in and out of investments, whether in shares of other companies or in capital assets, is recorded. The gains or losses from investment activities, including but not limited to shares of other companies (non-controlling interest) and the gains or losses experienced with subsidiaries, as well as negative cash flow or positive cash flow into or out of capital investment projects such as production infrastructure, are recorded in a portion of the Cash Flow Statement called Investing Activities. Continue reading...

What is Cash Flow After Taxes?

Cash flow after taxes (CFAT) is nearly the same thing as EBITDA, but with taxes left in. One way to arrive at Cash Flow After Taxes is to take the net income of the business and add in interest, amortization, depreciation and other non-cash expenses. This is one item away from the formula for EBITDA, which also adds tax back in to arrive at the Earnings Before Interest, Taxes, Depreciation and Amortization. Continue reading...

What are Debt Ratios?

Debt ratios give a relative picture of a company’s ability to repay debts, make interest payments, and meet other financial obligations. They generally compare the level of debt in a company to the level of assets. Debt ratios are key for investors and particularly creditors, to determine the overall level of financial risk faced by a company. Debt ratios that increasingly turn unattractive can serve as “canaries in a coal mine” that a company is in danger of bankruptcy or default. There are several types of debt ratios, such as debt-to-equity, debt-to-capital, cash flow to debt, and so on. Continue reading...

What is Operating Cash Flow (OCF)?

Operating cash flow is the amount of cash a company is able to generate from its operations - i.e., how much real cash flow is being generated after accounting for expenses. It is calculated by adjusting net income for items like depreciation and changes in inventory. A company’s OCF is an important metric in determining whether it can generate cash flow without requiring external financing. The timeliness and frequency of cash flows is important as well, in that a company ideally produces consistent and favorable OCF. Continue reading...

What is the Debt-to-Equity Ratio?

Also known as ‘leverage,’ the debt-to-equity ratio indicates the relative proportion of a company’s debt to total shareholder equity. Given that debt is looked at relative to shareholder equity, the debt-to-equity ratio is often given greater consideration than the debt ratio for determining leverage and risk. Similar to debt ratio, a lower debt-to-equity means that a company has less leverage and a stronger equity position. Continue reading...

What are Subprime Loans?

Subprime loans are loans made by institutions to individuals who do not meet the industry standards for a desirable loan client. Lenders such as banks and mortgage companies are able to shift much of the risk of loans they make by selling the debt off to investors and investment banks in the form of collateralized mortgage obligations and other forms of securitized debt. This paves the way for lenders to adopt more liberal guidelines around who can receive a loan for their home purchase and so forth. A thorough banker who is preserving the financial stability of his employing institution will perform due diligence to prove that a client can meet the repayment schedule for the loan by showing adequate cash flow and credit history. Continue reading...

What is the Debt Ratio?

The debt ratio measures a company’s total debt to total assets. It is the simplest calculation available for determining how indebted a company is on a relative basis. The debt ratio is crucial for determining a company’s financial standing, and should be considered by potential investors. To calculate the debt ratio, one only needs to divide total liabilities (i.e. long-term and short-term liabilities) by total assets. Continue reading...

What is Dividend Yield?

A dividend yield is a ratio that represents how much a company pays in annual dividends relative to its share price. A dividend yield is represented as a percentage, and is easily calculated. Simply divide the annual dividends paid per year (dollar value) by the per share price of the stock. Here’s the equation in simple terms: Annual Dividends Per Share / Price Per Share = Dividend Yield A company with a higher dividend yield means they pay out more of their profits to shareholders, but it also means that company may be allocated less of their free capital towards investment, research, and other growth areas. Continue reading...

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What should I look for in a good Investment Performance Evaluation calculator?

A good investment performance calculator will give you the ability to input various cash flow scenarios and compute weighted returns, among other options. A really useful investment performance calculator will allow you to input various cash flow scenarios and to see weighted returns based on these. Dollar-and-time-weighted performance, dividend cash flows, deposits and withdrawals, as well as fees paid for various transactions, will all be incorporated in a good calculator. Continue reading...

What is the Debt to Capital Ratio?

The debt-to-capital ratio is a measure of a company’s leverage that looks at total debt compared to total capital (shareholder equity + debt). This measure of leverage is not a globally accepted accounting practice, therefore it is important for analysts to learn exactly what is being included by the company as their debt and equity in calculating the ratio. Generally speaking, a higher debt to capital ratio indicates that the company is financing more of its operations and needs through the debt markets versus with equity. Comparing debt-to-capital ratios amongst companies within the same sector or industry can be a useful exercise. Continue reading...