Cash Flow Margin

The cash flow margin shows you the relationship between your cost structure and your revenue stream. This is an indicator of how well an operation is being managed. High cash flow margins are indicative of two things: a high price environment and/or an efficient operation. Let's assume you are looking at a merger of equals with a competitor. Assume the value proposition is to increase revenue and cash flow. What are the impacts to the productivity of your assets overall? Assume that the merger would result in higher short-term costs that would decrease your cash flow margin by 2 percent. The short-term decline in ROA is 8 percent if the ratio between sales and assets is held constant (Exhibit 7-4). The question you need to ask yourself is whether the spike in costs is short-term. In this case, we are trading a revenue increase for efficiency.

Exhibit 7-4: Effect of a decrease in cash flow margin on return on assets.

	Cash Flow Margin		Asset Turnover	=	Adjusted ROA
Your Company	12%		4	=	48%
Combined Companies	10%		4	=	40%