The Cash Flow Margin is a measure of how efficiently a company converts its sales dollars to cash. Since expenses and purchases of assets are paid from cash, this is an extremely useful and important profitability ratio. It is also a margin ratio.
The Cash Flow Margin is calculated as:
Cash Flow Margin = Cash Flows from Operating Activities/Net Sales = _______%
How Companies Use the Cash Flow Margin Ratio
The higher the percentage, the more cash available from sales. Cash Flows from Operating Activities, the numerator, comes from the Statement of Cash Flows. Net Sales comes from the income statement.
If a company is generating a negative cash flow, which would show up as a negative number in the numerator in the cash flow margin equation, then even as it is generating sales revenue, it is losing money. The company will have to borrow money or raise money through investors in order to keep on operating.
