Can you generate cash?
Find out whether regular operations produce cash and what remains after investment in long-term assets.
A clearer view of your business
Know what your numbers are telling you.
Revenue alone cannot tell you whether your business has enough cash for its bills, room to make debt payments, or profit left after its costs. Start with the measures that answer those questions.
Try a financial snapshot
The approach
A useful order for the questions that matter.
Begin with cash and upcoming obligations. Then examine profitability, how capital is used, and whether growth strengthens the business. Every measure needs context and a look at its trend.
Can you meet obligations?
Compare available resources with debt payments and bills due in the near term.
Is the business getting stronger?
See what sales leave behind, where cash is tied up, and whether growth helps.
01 / 06 · Cash
Is the business generating cash?
Accounting profit and cash in the bank can move in different directions. Start with cash produced by regular operations.
Operating cash flow & free cash flow
What remains when the business runs?
Operating cash flow reflects cash from regular business activity. Free cash flow deducts capital expenditures such as equipment purchases.
Look closer: Compare operating cash flow with net income over time. Review collections, inventory, and payment timing if they diverge.
How it is calculated
Operating cash flow comes from the statement of cash flows. Under the indirect method, start with net income and adjust for noncash items and changes in operating assets and liabilities. Free cash flow = operating cash flow − capital expenditures.
02 / 06 · Debt
Can it make its debt payments?
Required principal and interest payments need cash at specific times. Profit alone does not show whether those payments can be met.
Debt service coverage ratio · DSCR
Cash available compared with required payments.
A DSCR of 1.0× means the chosen cash-flow measure exactly equals scheduled debt service for the same period. The appropriate level depends on the lender, loan, industry, and cash-flow volatility.
Look closer: Review the trailing twelve months, all debt payments, upcoming maturities, and the effect of weaker sales or higher interest costs.
How it is calculated
DSCR = defined cash flow available for debt service ÷ required principal and interest for the same period. Define the numerator clearly; real estate and operating-company methods may differ.
03 / 06 · Liquidity
Can it cover near-term bills?
Assets on a balance sheet do not all turn into cash equally quickly. Look behind the ratio.
Current ratio & quick ratio
Two views of short-term resources.
The current ratio compares current assets with current liabilities. The quick ratio focuses on more readily available assets, generally excluding inventory and prepaid expenses.
Look closer: Check receivables aging, inventory quality, restricted cash, and payments coming due. A wide gap between ratios may point to significant inventory.
How it is calculated
Current ratio = current assets ÷ current liabilities. Quick ratio = (cash and equivalents + marketable securities + eligible receivables) ÷ current liabilities.
04 / 06 · Profit
What does each sale leave behind?
Three margins show where revenue is absorbed by direct costs, operating expenses, interest, and taxes.
Gross profit margin
After direct costs.
Shows the room left to cover overhead and everything below it. Review pricing, labor, materials, freight, and product mix if it falls.
How it is calculated
(Revenue − cost of goods sold) ÷ revenue × 100.
Operating profit margin
After running the business.
Reveals whether overhead is growing faster than sales. Compare it with gross margin to locate where pressure begins.
How it is calculated
EBIT operating margin = operating income ÷ revenue × 100. EBITDA margin uses EBITDA instead; label it separately.
Net profit margin
The accounting bottom line.
Shows how much revenue becomes net income. Positive net income does not necessarily mean cash is available today.
How it is calculated
Net income ÷ revenue × 100.
05 / 06 · Capital
Where is money tied up?
Connect borrowing, collections, inventory, and returns on capital committed to the business.
Debt-to-equity
How much borrowing supports the business?
Read leverage with cash flow and debt maturities. Very small or negative equity can make the ratio misleading.
How it is calculated
Funded debt-to-equity = interest-bearing debt ÷ book equity. Total liabilities-to-equity is a different ratio.
Cash conversion cycle
How long until cash comes back?
A longer cycle can strain cash even as sales grow. Examine collections, inventory turnover, and supplier terms.
How it is calculated
Days sales outstanding + days inventory outstanding − days payable outstanding. Use consistent periods and appropriate average balances.
Return on invested capital · ROIC
Is capital earning an adequate return?
Compare after-tax operating returns with a defensible estimate of the business's cost of capital.
How it is calculated
Net operating profit after tax ÷ average invested capital. Define treatment of debt, equity, excess cash, and leases consistently.
06 / 06 · Growth
Is growth helping the business?
Rising revenue matters most when cash flow and margins can support it.
Revenue growth
More sales. What happened to cash?
Growth can require more inventory, staff, and receivables before customers pay. Read it beside cash flow, margins, and the cash conversion cycle.
Look closer: If sales rise while operating cash flow falls, check collections, inventory, and margins.
How it is calculated
(Current-period revenue − comparable prior-period revenue) ÷ comparable prior-period revenue × 100. Explain acquisitions and unusual changes.
Your source documents
Know where to find the numbers.
Use comparable periods. Two or three years of history can make a trend clearer than a single result.
Income statement
Revenue, expenses, and accounting profit over a period. Use it for margins and growth.
Balance sheet
Assets, liabilities, and equity at a point in time. Use it for liquidity and leverage.
Statement of cash flows
Cash moving through operations, investing, and financing. Compare earnings with cash generated.
Debt schedule and aging reports
Payment amounts and maturities, plus receivables, inventory, and payables detail that explains ratios.
Start with cash. Then see the whole business.
Walk through the six questions and note what needs a closer look with your accountant or lender.
Try a financial snapshot