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.
Related AccountingTools Courses
The Interpretation of Financial Statements
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
Example of the Cash Flow to Capital Expenditures Ratio
A company has cash flow from operations of $4,000,000 and capital expenditures totaling $1,000,000 for the year. Its cash flow to capital expenditures ratio is calculated as follows:
$1,000,000 Cash flow from operations ÷ $4,000,000 Total capital expenditures = 0.40 Cash flow to capital expenditures ratio
This means that the company generates four dollars of operating cash for every dollar it spends on capital investments, indicating strong internal funding capacity for asset growth or maintenance.