The Cash Flow of ABC Limited Essay Example | Topics and Well Written Essays - 1000 words

The Cash Flow of ABC Limited - Essay Example The cash flow statement provides valuable information on the quality of income and sales, dividend and interest covers, the cash available per share and the cash returns generated by the assets. These are discussed in the following sections. In addition to the quick ratio or current ratio (Monetary Assets / Current Liabilities) and the liquidity ratio (Current Assets / Current Liabilities), another very useful ratio to analyses a company’s performance is the quality of income (Net Cash Inflow from Operations/ Net Profit before Interest and Tax). The quality of income ratio helps understand the company’s income a little better. The net cash inflow for ABC Limited is  £155 and the Profits before interest and tax totals to  £67, thus making its Quality of Income Ratio as 2.313. This ratio helps analyze the amount of free cash that has been utilized to increase the capital expenditure. It computed as Retained Cash Flow (After Div. Paid) / Cash Paid for Acquisition. For the case of ABC Limited, the amount of money that has been invested to capital expenditures is  £ 115 and the total amount of free cash is  £134 (i.e. Net cash from Operating Activities less the tax paid less the dividends paid = 155 - 15 – 6). Thus the capital expenditure ratio totals to 1.165%. It is clear that ABC limited has invested a high amount in capital expenditures and still there is a net increase in cash, indicating that the company has performed very well in terms of collecting the cash from the customers. The cash owing cover signifies the total amount of free cash (i.e. Net Cash income from operations less the tax, less interest and fewer dividends) that is used to settle the total owing of the company. Calculation of the cash owing cover can be done by dividing the total owing by the retained cash from operations (after dividend). ABC Limited has a total owing of  £72 m and the net free cash after dividends totals to  £134 m (155 – 15 – 6 ) thus making the cash owing cover to total to 0.537. Therefore the number of years to pay off debt is 0.5years or 6 months. This indicates that ABC limited can pay off the debts in a very short period.