Accounting › Section O · Cash flows and statement analysis › Topic O.3
Cash flow ratios for liquidity and solvency
Accrual profit depends on estimates; cash in the bank does not. Ratios built from the statement of cash flows show whether a company can pay its bills, carry its debt and still invest, and they are a quick test of how much its reported profit is worth.
In this topic
- Why ratios built on cash
- Free cash flow
- Free cash flow to sales and to assets
- A cash measure of liquidity
- A cash measure of solvency
- Cash and the quality of earnings
- Worked example: a full set for Northfield Bakeries
- Worked example: profit up, cash down
- Reading negative free cash flow
- Common mistakes to avoid
- Key takeaways
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