CFO to PAT ratio
Cash flow from operations to net profit
The CFO to PAT ratio compares five years of cash flow from operations with five years of reported net profit. It is the simplest anti-fraud check in fundamental analysis.
Formula
CFO to PAT
CFO to PAT = Sum of 5 years' Cash Flow from Operations ÷ Sum of 5 years' Net Profit
Benchmark: Above 1, or at least above 0.8
Reading the number
Accounting books profit at the moment of sale, not at the moment of payment. Sell ₹100 of goods on a one-month credit and the books immediately show ₹100 of sales and ₹20 of profit. But cheques bounce and accounts run empty. The cash flow statement fixes this by showing when money actually arrived.
Use operating cash flow only. Not investing cash flow, not financing cash flow, because only operating cash flow shows money earned from the actual business of selling goods. Use five years, not one, because the figure swings from year to year as collections shift by a month or two. A gap of 2 to 4 percent over five years is normal. Operating cash flow far below net profit is a very dangerous sign. This one check screens out most fraudulent companies and most companies that fudge their numbers.
Indian example
Related ratios
Glossary terms
From the research
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