Operating cash flow ratio is very important tool when it comes to judging the liquidity position of the company and it also helps in giving early signals whether a company is going to be bankrupt. Given below is the formula for operating cash flow ratio –
Operating Cash Flow/Current Liabilities
In the above formula operating cash flow refers to that cash which is available with the company after deducting all expenses including taxes, however it includes depreciation as it is an expense which is only made in books and not in reality. If the above ratio is less than 1 than it indicates that the firm is not generating enough cash to pay its short term liabilities and failure to maintain this ratio above 1 can lead to insolvency of the company in the short run.
However other ratios should also be looked at before reaching to any conclusion because it may be possible that firm is deploying funds for productive purpose like purchasing of machinery in order to increase production, employing more workers, improving the brand image of the company and so on.