Cash flow to capital expenditures ratio
/What is the Cash Flow to Capital Expenditures Ratio?
The cash flow to capital expenditures ratio is used to determine an organization’s ability to acquire capital assets using its free cash flow. A high ratio indicates that a business has a reduced need to use debt funding or equity funding to support its capital expenditure requirements. Conversely, a low ratio indicates that management may be constrained by funding availability, and so may need to retain fixed assets longer than would normally be the case.
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How to Calculate the Cash Flow to Capital Expenditures Ratio
The cash flow to capital expenditures ratio is calculated by dividing cash flow from operations by capital expenditures. Both of these items can be found in a reporting entity’s statement of cash flows. The capital expenditures information is located within the cash flows from investing activities section of the statement of cash flows. The formula is as follows:
Cash flow from operations ÷ Total capital expenditures = Cash flow to capital expenditures ratio