Compares operating cash flow to net income. When cash flow exceeds earnings, the company's profits are well-supported by actual cash. This is one of the nine criteria in the Piotroski F-Score.
Formula
Description
Compares operating cash flow to net income to assess earnings quality. The Piotroski F-Score awards a point when operating cash flow exceeds net income. Low accrual ratios can indicate that earnings are being inflated by aggressive accounting rather than real cash generation.
Interpretation
Above 1.0 means cash flow exceeds reported earnings, a positive quality signal. Below 0.8 consistently warrants investigation into the gap. One of the nine criteria in the Piotroski F-Score.
Related Integrity Indicators
Operating cash flow divided by total debt. Measures how quickly a company could repay all its debt from operating cash flow alone. Above 0.5 means the company could theoretically pay off all debt in two years from operations. Below 0.15 signals heavy debt relative to cash generation.
Free cash flow divided by net income. Above 1.0 means the company generates more cash than its reported profits, a hallmark of high-quality earnings. Consistently below 0.7 is a red flag.
What percentage of revenue must be reinvested in capital assets. Below 8% is capital-light and attractive. Buffett prefers businesses that don't require large ongoing capital outlays to maintain their competitive position.
What percentage of operating cash flow is consumed by capital expenditures. The remainder is free cash flow. Below 40% leaves ample cash for dividends, buybacks, and growth investments.
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