Now the two workhorse ratios. Both ask what fraction of the accounting profit became operating cash. They differ in which profit line they test.
First comes CFO/NI. Think of it as the accruals check.
CFO/NI = cash flow from operations ÷ net incomeUse consolidated CFO over consolidated net income including minority interests. The CFS consolidates 100%, so the denominator must too. It's the same claimholder-consistency logic you used for returns on capital.
Where does the benchmark come from? CFO adds back D&A, and for any business with fixed assets that's a big number. So a healthy company's CFO should normally exceed net income, because the depreciation add-back outweighs the working-capital toll. Here are the rules of thumb, as multi-year averages, since a single year is noise:
| CFO/NI (5-yr avg) | Reading |
|---|---|
| ≥ 1.2 | Comfortable: typical for anything capital-intensive (big D&A add-back) |
| 1.0 – 1.2 | Normal for asset-light services (small D&A, small WC) |
| 0.8 – 1.0 | Investigate the composition; fast WC-consuming growth can explain it, nothing else should |
| < 0.8 persistently | Red flag: profits are accruing, not converting, with receivables or inventory absorbing the "earnings." Escalate to the forensic toolkit (M2.07's Sloan accruals ratio is this ratio's formal cousin) |
The most valuable read is the trend against the level. Net income marching up while CFO/NI marches down means each extra rupee of profit is arriving in weaker currency. Two consecutive years of NI up and CFO flat or down is your earliest, cheapest divergence alarm. The master map makes it the gate here ("spot divergence between profit and cash early") because the same pattern came before Manpasand and PC Jeweller, and before half the forensic case files.
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What does the CFO to EBITDA ratio measure?
EBITDA pretends to be cash flow, and CFO/EBITDA measures the pretence. Call it the leakage check.
CFO/EBITDA = cash flow from operations ÷ EBITDAWalk the gap through instead of memorizing it. Start from EBITDA. Real life subtracts cash taxes first, because EBITDA is pre-tax while CFO is post-tax. It subtracts working-capital consumption. Under US GAAP, where interest paid goes inside CFO, it subtracts cash interest too. Smaller items push either way: provisions timing, and the SBC add-back, which raises the ratio. So for a US-convention statement:
CFO ≈ EBITDA − cash taxes − ΔWC − cash interest ± otherBenchmark ranges for mature non-financial companies, as rules of thumb, with US-style CFO that has interest inside:
| CFO/EBITDA (5-yr avg or cumulative) | Reading |
|---|---|
| ≥ 70% | Strong conversion: taxes and WC are taking a normal bite and nothing else is leaking |
| 50 – 70% | Typical; check which component eats the gap (heavy cash taxes are honest; a WC hole is a question) |
| < 50% persistently | Leakage: either working capital is a sink, EBITDA is inflated (aggressive revenue or capitalization), or interest is devouring the middle. Find out which |
How do you compare CFO to EBITDA fairly across companies?
Two habits keep this ratio fair. First, restate before comparing. An Ind AS borrower's CFO excludes interest paid, so its CFO/EBITDA is structurally higher than a US twin's. For a leveraged company the flattery is worth 15 to 30 points of the ratio, and Worked Example 3 puts numbers on it. Subtract cash interest from the Ind AS CFO, or add it back to the US one. Either direction works as long as you stick to one convention. Second, use cumulative windows. Sum five or ten years of CFO and divide by the same years' summed EBITDA. Working-capital noise nets out, and what's left is the structural conversion rate. Marcellus's forensic screens popularized this cumulative form in India, and it's among the highest-signal single numbers in quality screening.
A decade of cumulative CFO/EBITDA above ~70 to 80% is compounder territory. Below ~50%, the EBITDA was, to a first approximation, a rumor.
Try a quick paired reading, India-style. The figures are illustrative and modeled on ~FY24/FY25 scale, so pull the actual filings. An IT-services major like Infosys runs CFO/NI ≈ 1.0 to 1.2 and CFO/EBITDA ≈ 70 to 80%. That's an asset-light business with small D&A and modest WC, converting for real. A capital-intensive EPC player can print the same EBITDA margin with CFO/EBITDA below 40% for years, because its profits exist mainly as receivables and retention money. Same P&L shape, different cash truth. The ratios are how you tell them apart from across the room.
The named cash-flow ratio set, and where each one already lives
Textbooks and exam syllabuses carry a standard roster of eleven cash-flow ratios with fixed names. Under other names, you've built most of them already with the working-capital ratios and in the sections above. The rest are one division away. Treat the table below as vocabulary work. There's no new machinery in it. Read it once so that a name on an exam paper or in a credit memo maps straight onto a ratio you already trust.
The worked column below is Mahanadi Cement's FY26 year from Worked Example 5. Four figures come from that exhibit: restated CFO ₹1,160 crore, revenue ₹7,150 crore, capex ₹1,560 crore, and operating income of 1,750 − 520 = ₹1,230 crore. Seven more are stated here because the exhibit does not carry them: average total assets ₹5,400 crore, average equity ₹2,600 crore, taxes paid ₹300 crore, gross debt ₹2,900 crore, long-term debt repaid ₹260 crore, dividends paid ₹140 crore, and 45 crore shares in issue.
| Named ratio | Formula | FY26 | You know it as |
|---|---|---|---|
| Cash flow to revenue | CFO ÷ revenue | 16.2% | FCF margin's older sibling; the numerator is CFO, not the residual (FCF margin) |
| Cash return on assets | CFO ÷ average total assets | 21.5% | ROA with cash in the numerator; pair it with M2.01's accrual ROA |
| Cash return on equity | CFO ÷ average shareholders' equity | 44.6% | ROE's cash twin; the divergence from ROE is the accrual wedge |
| Cash to income | CFO ÷ operating income | 94.3% | the CFO to net income and CFO to EBITDA family, measured against EBIT rather than EBITDA or PAT |
| Cash flow per share | (CFO − preferred dividends) ÷ weighted average shares | ₹25.78 | EPS's cash twin; every share-count caution applies to it |
| Debt coverage | CFO ÷ total debt | 40.0% | the inverse of M2.02's net debt/CFO; how many years of operating cash retire the debt |
| Interest coverage (cash basis) | (CFO + interest paid + taxes paid) ÷ interest paid | 9.11× | M2.02's EBIT interest cover, rebuilt from cash so no accrual can flatter it |
| Reinvestment | CFO ÷ cash paid for long-term assets | 0.74× | the capex funding test; below 1.0× means the build is not self-funded (capex to depreciation) |
| Debt payment | CFO ÷ cash long-term debt repayments | 4.46× | can this year's operations cover this year's maturities |
| Dividend payment | CFO ÷ dividends paid | 8.29× | the cash payout cover a payout ratio computed on PAT cannot see |
| Investing and financing | CFO ÷ (investing + financing cash outflows) | 0.59× | the whole-firm self-funding ratio; the numerator that has to stretch over everything |
Which cash-flow ratios belong on your sheet?
Two of the eleven earn a permanent place on your sheet. Reinvestment at 0.74× says the capex programme is being paid for with borrowed money, which is the same fact the negative FCF tells you. The investing-and-financing ratio, 1,160 ÷ (1,560 + 260 + 140) = 0.59×, says operations covered 59 paise of every rupee the company spent on assets, debt service, dividends, all combined. A company running below 1.0× on that ratio for several consecutive years has decided to fund itself externally. It may never say so anywhere in the annual report.
The other nine are worth recognising and rarely worth reporting. Cash return on equity in particular inherits every leverage distortion the ratio toolkit catalogued, and it has none of DuPont's ability to show you where the number came from.