52
Capital Expenditure ratio
Cash from operating activities
Capital Expenditures
Table 2.29: Formula of Capital Expenditure Ratio
From: The Power of cash flow ratios, 1998
2.7 Constraint of Excellent cash Flow Quality
In
order
to
be
identifying
as
an
excellent
cash
flow
quality,
a
company
should
be
able to accomplish several fundamental principles of how cash flow statement
should be prepared. The following points are some of the fundamental principles:
•
It
is
necessary
for
a
company
to
have strong
internal cash being
generated
from
the
operating
activities
which
is
supported
by
an
inclining
trend.
To
what
we
have
learned,
the
greater
the
amount
of
cash
being
generated
from operating
activities indicates that the company is performing well.
•
Next,
a
company should be
able to
have a positive
free
cash
flow even
after
the
company decided to make a long term investment.
•
The
company
must
be
able
to
pay
off
its
dividend
payments
as
well
as
stock
purchases. Thus
it
is
necessary
for the company to
have a positive
free cash
flow
available to pay off its equity holder.
•
On
the
other
hand,
a
company
should
be
able
to
fulfill
its
short
term
financial
obligation
such
as
interest
payment
without
affecting
the
flexibility of its
operating cash flow.
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