Cash Flow and the New Taxonomy of Financial Ratios for Manufacturing Firms

Analys ts derive a broad array of financial ratios from published financial reportS to assess business enre rprise perfonnance. Only a few ratios, however, yield meaningful iJlSight. The a do ption of Statement of Financial Accounting Standards (SFAS) No. 95, 'fhe Statement of Cash Flows . by the Financial Accounting Standards Boatd (FASB) in 1987 provided the impetus for the recent interest in cash flow ratios. This study explores the usefulness of cash flow ratios, relative to accrual-based financial ratios. in ~ the performance of manufacturing finns. Our findings show that cash flow ratios render bOth complementary and unique insight regarding a manufacturing finn's perfonnance and its "ability to pay." Therefore. we recommend that financial ratio analysis of a manufacturing firm should include both accrual-based and cash flow ratios.