Page 646 - Accounting Principles (A Business Perspective)

16. Analysis using the statement of cash flows

Analyzing and using the financial results—Cash flow per share of common stock, cash
flow margin, and cash flow liquidity ratios
The information in the statement of cash flows provides a basis for analyzing financial results. However, further

analysis is possible through the use of three ratios relating to cash flow: the cash flow per share of common stock,
cash flow margin, and cash flow liquidity ratios. The ratios shown below are results for Synotech, Inc. and recent
results for other companies. All dollar amounts are rounded to the nearest million.
The cash flow per share of common stock ratio is equal to the net cash provided by operations divided by
the average number of shares of common stock outstanding. This ratio indicates the company's ability to pay
dividends and liabilities. The higher the ratio, the greater the ability to pay. The cash flow per share of common
stock ratios for the companies were:

Company Net cash provided Average shares of Cash flow
by operating common stock per
activities outstanding* share
(millions) (millions)
Synotech, Inc. $1,101 147 $7.49
J.C. Penney, Inc. 1,598 262 6.10
The Walt Disney 6,434 2,092 3.08
Company
General Electric 22,690 9,893 2.29
Company
*To determine the average number of shares, add the beginning and ending numbers outstanding and divide by
two.
The cash flow margin ratio is equal to net cash provided by operating activities divided by net sales. This

ratio is a measure of a company's ability to turn sales revenue into cash. The higher the ratio, the better. The cash
flow margin ratios for the companies were:
Company Net Cash provided Net sales Cash
by operating (millions) flow
activities Margin
(millions)
Synotech, Inc. $1,101 10,499 10.49%
J.C. Penney, Inc. 1,598 31,846 5.02%
The Walt Disney 6,434 25,402 25.33%
Company
General Electric Company22,690 128,051 17.72%
The cash flow liquidity ratio is equal to the total of cash, marketable securities, and net cash provided by

operating activities divided by current liabilities. This ratio is a test of a company's short-term, debt-paying ability.
The higher the ratio, the better. The cash flow liquidity ratios for the companies were:
Company Cash, marketable Current Cash
securities, liabilities flow
and net cash provided by (millions) liquidity
operating activities ratio
(millions)
Synotech, Inc. $1,470 $2,285 .64 times
J.C. Penney, Inc. 2,542 4,235 .60 times
The Walt Disney 7,276 8,402 .87 times
Company
General Electric 35,913 156,116 .23 times
Company
On the first of these measures, Synotech, Inc., seems to be in the strongest position, although all of the
companies are financially sound. On the second measure, Walt Disney and General Electric have the highest cash
flow margin ratios. On the third measure, Walt Disney seems to be in the strongest position. However, a more valid
comparison on each of these measures would be made if each of these companies was compared with other

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