Question

There are several financial ratios that are directly associated with the flow of cash in a business. From the list below, choose two ratios and discuss the following for each:

1. What role does sales (revenue) play with your ratio?
2. What role does debt play with your ratio?
3. Can this ratio be a distress indicator (Links to an external site.)Links to an external site. for a company? How?

Cash Flow Coverage Ratio

Cash Conversion Cycle

Answer 1

BASIS	CASH FLOW COVERAGE RATIO			CASH CONVERSION CYCLE(CCC)
FORMULAE	OPERATING CASH FLOWS			DAYS OF(INVENTORY OUTSTANDING+
	TOTAL DEBT			SALES OUTSTANDING-PAYABLE
				OUTSTANDING)
ROLE OF SALES	AMOUNT OF SALES IS INCLUDED IN			IN CCC ONLY THE SALES ON ACCOUNTS
	THE OPERATING CASH FLOWS. AS			ARE REQUIRED NOT THE CASH SALES
	AMOUNT OF SALES INCREASES			THE NUMBER OF DAYS IN WHICH
	THE CASH FLOW COVERAGE RATIO			CREDIT SALES ARE RECOVERED IS
	ALSO INCREASES			REQUIRED. LOWER THE DURATION
	SALES AND THE RATIO ARE			LOWER IS THE CASH CONVERSION CYCLE
	DIRECTLY PROPOTIONAL
ROLE OF DEBT	THE AMOUNT OF DEBT IS REQUIRED IN			IT COVERS ONLY A PART OF SHORT
	THE DENOMINATOR. THE LOWER THE			TERM DEBT IN FORM OF ACCOUNTS
	AMOUNT OF DEBT, THE HIGHER WILL			PAYABLE
	BE THE CASH COVERAGE RATIO
	IT COVERS BOTH THE LONG TERMA AND
	SHORT TERM DEBT
DISTRESS	YES, IT SHOWS WETHER OPERTAING			YES, IN HOW MANY DAYS COMPANY
INDICATOR	CASH FLOWS CAN COVER THE DEBT			ROTATES ITS CASH. THE AMOUN OF DAYS
	OF THE COMPANY. WETHER			THE CASH OF THE COMPANY IS BLOCKED.
	COMPANY HAS ADEQUATE OPERATING			THE LOWER THE DAYS THE MORE IT IS
	CASH FLOWS			BETTER.