Most investors have gone through their entire investing careers without ever having heard of the operating cash flow ratio. Operating cash flow is the amount of money raised through actual operations, after the actual bills have been paid. And when you divide operating cash flow by current liabilities, you have the operating cash flow ratio. Current liabilities are bills that need to be paid within a year of receiving them, such as taxes and payroll. Needless to say, a smaller operating cash flow ratio is a better determinant of the strength of the company in question. In order to understand the power of the operating cash flow ratio, you need to remember that bills are paid in cash.

Do you know anyone who can never seem to pay all of their bills without getting a loan or sacrificing something? While most people have a little something left over after every pay check, some folks just never seem able to keep things together. Would you want to make a loan to that person? If not, you are wise. And the same reasoning holds true for companies that always seem to be teetering on the brink of financial ruin through poor operating cash flow ratios. Being close is okay in some cases, but for the most part lower is certainly better.

If a company has an exceptional operating cash flow ratio, that means it has the ability to easily meet all of its short term financial obligations through the cash it throws off. This is as opposed to having to sell off its assets, in an effort to pull through a difficult situation. If a company were only one or two setbacks away from having to file for bankruptcy protection, this might be the kind of company you want to avoid investing in. However, it is always best to consider that they may have other events going on which are not evident through the numbers alone.