What is Cash Reinvestment Ratio?
Cash reinvestment ratio is a measure of how much cash flow a company reinvests in its business, rather than paying out to shareholders or creditors. It is calculated by dividing the increase in fixed assets and working capital by the net cash flow from operations, minus dividends and non-cash sales. A high cash reinvestment ratio indicates that a company is investing heavily in its growth, while a low ratio suggests that a company is paying out more to its owners or lenders.
The formula for cash reinvestment ratio is:
How to Calculate Cash Reinvestment Ratio in Excel?
To calculate cash reinvestment ratio in Excel, you need to have the following data for a given period:
- Increase in fixed assets: This is the net change in the value of property, plant, and equipment (PP&E) on the balance sheet. You can calculate it by subtracting the beginning balance of PP&E from the ending balance of PP&E.
- Increase in working capital: This is the net change in the value of current assets minus current liabilities on the balance sheet. You can calculate it by subtracting the beginning balance of working capital from the ending balance of working capital.
- Net cash flow from operations: This is the amount of cash generated by the core business activities on the cash flow statement. You can find it as the first section of the cash flow statement, or calculate it by adjusting the net income for non-cash items and changes in working capital.
- Dividends: This is the amount of cash paid out to shareholders as a distribution of profits on the cash flow statement. You can find it as a part of the financing activities section, or as a separate line item on the statement of changes in equity.
- Non-cash sales: This is the amount of revenue that is recognized but not received in cash on the income statement. For example, sales on credit or deferred revenue. You can estimate it by subtracting the cash received from customers from the revenue reported on the income statement.
Once you have these data, you can use the following steps to calculate cash reinvestment ratio in Excel:
- Enter the data in separate cells, such as A1 to A5.
- In another cell, such as B1, enter the formula:
=(A1+A2)/(A3-A4-A5) - Press Enter to get the result.
Example of Cash Reinvestment Ratio in Excel
Let’s say you want to calculate the cash reinvestment ratio for a company with the following data for the year 2023:
| Data | Amount |
|---|---|
| Increase in fixed assets | $50,000 |
| Increase in working capital | $30,000 |
| Net cash flow from operations | $200,000 |
| Dividends | $40,000 |
| Non-cash sales | $10,000 |
You can use the following Excel table to calculate the cash reinvestment ratio:
| Data | Amount | Formula |
|---|---|---|
| Increase in fixed assets | $50,000 | =B2 |
| Increase in working capital | $30,000 | =B3 |
| Net cash flow from operations | $200,000 | =B4 |
| Dividends | $40,000 | =B5 |
| Non-cash sales | $10,000 | =B6 |
| Cash reinvestment ratio | 0.5 | =($B$2+$B$3)/($B$4-$B$5-$B$6) |
The result is 0.5, which means that the company reinvested 50% of its net cash flow from operations in its fixed assets and working capital, and paid out the remaining 50% to its shareholders or creditors.
Alternative Methods to Measure Cash Flow Reinvestment
There are other methods to measure how much cash flow a company reinvests in its business, such as:
- Cash flow to capital expenditures ratio: This ratio compares the net cash flow from operations to the amount spent on fixed assets. It is calculated by dividing the net cash flow from operations by the capital expenditures. A high ratio indicates that a company is generating more cash than it needs to maintain or expand its fixed assets, while a low ratio suggests that a company is spending more than it earns on its fixed assets.
- Cash flow to sales ratio: This ratio compares the net cash flow from operations to the revenue. It is calculated by dividing the net cash flow from operations by the revenue. A high ratio indicates that a company is converting a large portion of its sales into cash, while a low ratio suggests that a company is struggling to collect cash from its customers or has high operating expenses.
- Cash return on assets ratio: This ratio compares the net cash flow from operations to the total assets. It is calculated by dividing the net cash flow from operations by the average total assets. A high ratio indicates that a company is efficiently using its assets to generate cash, while a low ratio suggests that a company is wasting its assets or has low profitability.
