EVALUATING A CASH FLOW STATEMENT

Prakash Deo
University of Houston-Downtown

ABSTRACT

Financial statement analyses generally include little discussion of cash flows. Many cash
flow ratios have been developed along the lines of the traditional ratios and many of the cash flow
ratios are derived by substituting cash flow from operations for the net income or the current
assets in the traditional ratio analysis. There is no common consensus among researchers on
developing objective analytical tools for analyzing cash flow data. Therefore, it is not surprising
that cash flow ratios have not yet become common practice.
The purpose of this study is to derive two cash flow measures, and demonstrate in a
meaningful way the linkages between the basic financial statements and the cash-flow measures.
The authors derive and recommend two measures of cash flow, identify the underlying critical
variables, and develop a set of cash flow-based financial ratios, which in combination with the
traditional financial ratios derived from the income statement and balance sheet aid the decision
makers in assessing a comprehensive financial performance of a firm.

Keywords: Financial ratios, ratio analysis, cash flow statement, free cash flow, change in internal cash, capital
intensity, operating margin, internal financing, external financing