What Is the Cash Flow Margin?

Calculating Cash Flow Margin

Close up of cash transaction
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The cash flow margin is one of the most important profitability ratios. The cash flow margin ratio tells a company how well it converts sales to cash. It takes cash to pay expenses, so the conversion of sales dollars to cash is extremely important.

Using Profitability Ratios

Profitability ratios show a company's overall efficiency and performance. We can divide profitability ratios into two types: margins and returns.

Ratios that show margins represent the firm's ability to translate sales dollars into profits at various stages of measurement. Ratios that show returns represent the firm's ability to measure the overall efficiency of the firm in generating returns for its shareholders.

What Is Levered Free Cash Flow?

Levered free cash flow is the "free cash flow" that is left after a business has met its financial obligations on any accrued debt. The levered cash flow is the amount of cash left over for stockholders after all financial obligations are met.

How is The Cash Flow Margin Calculated?

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.

 What is the Net Profit Margin Ratio?

The net profit margin ratio is a profitability ratio that is a margin ratio. It can be calculated by using numbers off the company's income statement. Net profit margin is the number of dollars of after-tax profit a firm generates per dollar of sales. If a firm generates $1.00 of sales revenue, for example, and has a 5 percent net profit margin, that means it generated 5 cents of profit.

Net Profit Margin Ratio = Net Income/Net Sales = ________%

Net sales is simply sales revenue with any returns and allowances subtracted out. Net Income is income with all expenses subtracted out including taxes, interest expenses, and depreciation. It is the "bottom line."

How Companies use the Net Profit Margin Ratio

Net profit margin indicates how well the company converts sales into profits after all expenses are subtracted out. Since industries are so different, the net profit margin is not very good at comparing companies in different industries.

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