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Measures a company’s efforts to invest in itself by acquiring long term purchases.[sc:kit02 ]
Cash Flow to Capital Expenditures Formula
Explanation of Cash Flow to Capital Expenditures
The Cash Flow to Capital Expenditures ratio measures a company’s efforts to acquire long term purchases to better equip itself to do business. Capital Expenditures of some companies go in cycles – making a series of large purchases over a few periods followed by a time of relative small activity while the company attempts to recoup its investments. Resultantly, this ratio will also often fluctuate in cycles, depending on the company’s activities.
Importance of Cash Flow to Capital Expenditures
A high, or increasing Cash Flow to Capital Expenditures ratio is usually a positive sign, indicating the company has financial flexibility to invest in itself and make upgrades to its buildings, machinery, and processes. This ratio is very industry specific – industries requiring large financial investments to operate will have a significantly different result than industries requiring small financial outlays.