Operating Cash Flow Ratio
A lack of liquidity can kill businesses sooner than insolvency. While a business can continue operating for a while after becoming insolvent, a lack of liquidity will certainly bring operations to a screeching halt. This statement is particularly true for businesses such as banks that operate with significant leverage.
Hence, in this article, we will discuss the operating cash flow ratio (OCFR), a key liquidity metric, and also review the OCFRs across various sectors and industries. Read on to know more!
What is the operating cash flow ratio?
The operating cash flow ratio (OCFR) is a financial metric that helps investors evaluate a company’s liquidity. It is calculated by simply dividing the operating cash flow by the current liabilities. You can think of it as the number of times a company can pay out its current liabilities with the cash generated from its core business.
Operating cash flow ratio (OCFR) formula
Operating cash flow ratio (OCFR) = Operating cash flow/Current liabilities
Operating cash flow formula
Operating cash flow = Net income + Non-cash expenses – Increase in working capital
How to interpret operating cash flow ratios?
- Ratio Greater Than 1: Indicates strong liquidity; the company is generating enough (or more than enough) cash from operations to cover its short-term obligations. This is generally considered financially healthy
- Ratio Equal to 1: The company’s operational cash just meets its current obligations; while this is not alarming, there is little to no buffer for unexpected costs.
- Ratio Less Than 1: Indicates potential liquidity problems; the company is not generating enough cash through operations to pay its current debts. This may force reliance on financing or asset sales
Operating cash flow ratios across various industries
We have collected operating cash flow data for 285 industries across 13 sectors.
High-performing sectors- (CF Ratio > 1.0)
Exceptional Cash Flow Generation
Energy and utilities sectors dominate high performance with CF ratios often exceeding 2.0, driven by asset-heavy infrastructure, stable demand, and pricing power. Natural gas distribution, petroleum refining, and pipeline operations show exceptional cash generation due to high barriers to entry and essential service characteristics.
| Industry | AVERAGE of Operating CF Ratio |
|---|---|
| TRUCK TRAILERS | 27.784 |
| GAS & OTHER SERVICES COMBINED | 26.258 |
| PIPE LINES (NO NATURAL GAS) | 13.487 |
| NATURAL GAS DISTRIBUTION | 6.738 |
| MINERAL ROYALTY TRADERS | 5.741 |
| HOTELS & MOTELS | 5.205 |
| SERVICES-HELP SUPPLY SERVICES | 5.015 |
| SERVICES-TO DWELLINGS & OTHER BUILDINGS | 3.737 |
| NATURAL GAS TRANSMISSION | 3.687 |
| OIL ROYALTY TRADERS | 3.681 |
| BITUMINOUS COAL & LIGNITE SURFACE MINING | 3.597 |
| OIL & GAS FIELD EXPLORATION SERVICES | 3.582 |
| ELECTRIC & OTHER SERVICES COMBINED | 2.508 |
| ELECTRIC SERVICES | 2.48 |
| PLASTICS PRODUCTS, NEC | 2.477 |
| SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN | 2.289 |
| PETROLEUM REFINING | 2.207 |
| HOTELS, ROOMING HOUSES, CAMPS & OTHER LODGING PLACES | 2.19 |
| CRUDE PETROLEUM & NATURAL GAS | 2.11 |
| CEMENT, HYDRAULIC | 2.091 |
Moderate performers-(CF Ratio 0.3 – 1.0)
Solid Cash Flow Generation
Manufacturing shows clear polarization – specialized sectors like medical instruments, semiconductors, and specialty chemicals achieve strong cash flows through technical expertise and limited competition, while traditional manufacturing (metals, machinery, basic materials) struggles with commodity price volatility and intense competition.
| Industry | AVERAGE of Operating CF Ratio |
|---|---|
| SURGICAL & MEDICAL INSTRUMENTS & APPARATUS | 1.859 |
| TRUCKING (NO LOCAL) | 1.828 |
| DEEP SEA FOREIGN TRANSPORTATION OF FREIGHT | 1.808 |
| HEAVY CONSTRUCTION OTHER THAN BLDG CONST - CONTRACTORS | 1.776 |
| BITUMINOUS COAL & LIGNITE MINING | 1.654 |
| MANIFOLD BUSINESS FORMS | 1.624 |
| PLASTICS FOAM PRODUCTS | 1.593 |
| STEEL WORKS, BLAST FURNACES & ROLLING MILLS (COKE OVENS) | 1.587 |
| PAINTS, VARNISHES, LACQUERS, ENAMELS & ALLIED PRODS | 1.581 |
Under-performing sectors-(CF Ratio < 0.3)
Weaker Cash Flow Generation
Industries with negative CF ratios indicate potential financial stress, particularly in cyclical sectors like metal mining and consumer discretionary businesses. Successful cash flow generation correlates with operational leverage, market positioning, and pricing power, making asset utilization crucial for capital-intensive industries and differentiation essential for service-based businesses.
| Industry | AVERAGE of Operating CF Ratio |
|---|---|
| POTTERY & RELATED PRODUCTS | -0.854 |
| SERVICES-DIRECT MAIL ADVERTISING SERVICES | -0.651 |
| HAZARDOUS WASTE MANAGEMENT | -0.657 |
| CANNED, FRUITS, VEG, PRESERVES, JAMS & JELLIES | -0.572 |
| WHOLESALE-MEDICAL, DENTAL & HOSPITAL EQUIPMENT & SUPPLIES | -0.54 |
| WHOLESALE-DRUGS, PROPRIETARIES & DRUGGISTS' SUNDRIES | -0.503 |
| ELECTRICAL INDUSTRIAL APPARATUS | -0.499 |
| TRUCK & BUS BODIES | -0.421 |
| RADIOTELEPHONE COMMUNICATIONS | -0.38 |
| ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS | -0.356 |
| INVESTMENT ADVICE | -0.335 |
| METAL MINING | -0.327 |
| PREPARED FRESH OR FROZEN FISH & SEAFOODS | -0.326 |
Eqvista- Diligence that unlocks value!
The data suggests that asset-heavy industries that have significant non-cash expenses and industries with non-cash expenses tend to have high OCFRs. The results are mixed for service and financial sectors, reflecting the diversity of business models and working capital requirements within each industry.
At Eqvista, we believe that every datapoint holds crucial insights into the mechanisms of industries and companies. By harnessing these signals, we provide accurate valuation insights for startups across sectors and stages. Contact us to learn how we can decipher valuation insights hidden in your data!
