Cash Flow Margin

The Cash Flow Margin measures how well company operations are at creating cash from sales of their products and services.

Also called Operating Cash Flow Margin and Margin Ratio, the Cash Flow Margin measures how well a company's daily operations can transform sales of their products and services into cash. A key profitability ratio, relating Cash Flow from Operations to Net Sales provides powerful view into the inner workings of a company using two crucial measures of company performance.

Cash is what a company needs to generate to pay its expenses and purchase assets, and how well a company can convert sales into cash is crucial. Knowing that a company is continually improving its Cash Flow Margin is extremely valuable and is a key indicator of performance.

Companies that end up generating a negative cash flow are losing money as they generate sales and any company cannot keep this up over an extended period of time. With a negative cash flow, the company will have to rely on cash reserves or take on more debt as they continue the business.

You may have heard the slang term "burn-rate" or "runway", both of which are often used to describe a company operating with negative cash flows. A company in this situation would be "burning" through its cash reserves, with their limited of funds available. Much like an airplane attempting to take off, the company also has a finite "runway" left before they need to reach a position of positive cash flow.

Tags: Financial Ratio