Question

Cash generating power ratio measures the company's ability to generate cash from operations (rather than other activities).

a) True
b) False

Answer 1

The cash generating power ratio is true to measure a company's ability to generate cash from operations, assessing the efficiency at which sales are converted into cash.

Step-by-step explanation:

The statement that the cash generating power ratio measures the company's ability to generate cash from operations is true. The cash generating power ratio, also known as the cash flow margin ratio, is a financial metric that assesses how effectively a company can convert its sales or revenues into cash. It provides insight into the quality of earnings and the company’s efficiency at using its resources to generate cash, which is vital for meeting obligations, funding operations, and investing in the company's future growth. The higher the ratio, the better the company's performance in managing its cash flow from operations.

Answer 2

The cash generating power ratio is a true measure of a company's ability to generate cash from its core operations. It evaluates operational efficiency and self-sufficiency in meeting financial obligations and investing in growth. This ratio is calculated using EBITDA along with adjustments for non-cash items and changes in working capital.

Step-by-step explanation:

The statement that the cash generating power ratio measures the company's ability to generate cash from operations is true. This financial metric is specifically designed to assess how effectively a company can produce cash through its core business activities, excluding other sources such as financing or investing activities. To calculate it, one typically uses the company's earnings before interest, taxes, depreciation, and amortization (EBITDA), and sometimes adjustments are made for non-cash items and changes in working capital.

The ratio offers insight into the operational efficiency of the company and its capacity to sustain operations without relying on external funding. It also serves as a useful tool for creditors and investors who want to know how well a company can meet its financial obligations and invest in growth using the cash it generates on its own.