Self-Financing Ratio is a term that indicates the enterprise’s ability to finance planned investments from its own resources. Belongs to indicators based on cash flow.
Self-financing ratio = operating cash flow / investment
where Investment is planned volume of investment in the next year
How to use the indicator in practice?
In the enterprise it is used by CFO in financial analysis to analyze ratios. Indicators based on cash flow try to catch warning signs of potential credit problems and assess internal financial potential of the company. If the value of the ratio is greater than 1, the disposable income of the enterprise may be used also for other purposes than investment. Conversely, if the value is less than 1, the investments will need funds from an external source.
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