For instance if 90 days receivables are outstanding, it means on an average the company extends credit for (90/360), 25% of its sales at any given point of time. Compare With Days Sales Outstanding: The operating cash flow to sales ratio should also be somewhat in line with the days receivables outstanding ratio.Thus analysts can make more accurate prediction of the future years cash flows and therefore value the stock more accurately. However, the acid test comes when sales need to be converted to cash. Sometimes companies do fake transactions to ensure that sales numbers look good to the stock market. This can be done by changing the revenue recognition policy which allows accountants to book future income as income today. It is a known fact that companies can fudge the sales number relatively easily. Are The Companys Sales Genuine: The operating cash flow to sales ratio provides the analyst insight into the sales of the company.Thus analysts need to be wary of such accounting tricks at play to make the numbers look better than they are. However, companies have got innovative and have indeed shifted cash flow from financing and investing sections to the operating section. Cash Flow Has Not Been Manipulated: The total cash flow cannot be manipulated.Thus if the management changes the policies from one year to another, then the numbers are just not comparable. Earnings Have Not Been Manipulated: As has been discussed many times before, earnings are subject to easy manipulation by the management.

The direction of movement and the quantum of change must be highly correlated with the sales figures. Cash Flow Should Move In Direction And Proportion With Sales: If the sales are genuine, the cash flow will move more or less in correlation with the sales figure.But it is consistent, sustained record to do so that makes it more valuable. A company may be able to convert its sales to cash for one year. Used Over a Period of Time: Conclusions must not be drawn based on a single number.Operating Cash Flow to Sales Ratio = Operating Cash Flow / Sales Meaning The formula for this ratio can be easily judged by its name:

Operating cashflow