There are various scenarios exist not one exact can be derived unless you give the whole picture, this stays good in all stock analysis, although I try to give you the possible 4 reasons
- Aggressive accounting practices: The company might be managing its earnings through aggressive accounting methods, which inflate CFO relative to PAT.
- High depreciation or amortization: If the company has significant non-cash expenses like depreciation or amortization, it could lead to a higher CFO/PAT ratio.
- Tax management: Effective tax planning strategies could also influence the CFO/PAT ratio by reducing the tax impact on profits.
- Capital structure: If the company has substantial non-operating income or expenses, such as interest income or expenses from investments or financing activities, it could affect the ratio.
The ideal CFO/PAT ratio varies across industries and depends on factors like capital intensity, growth prospects, and business models. Generally, a higher ratio suggests better cash flow conversion from profits, but a sustainable and stable ratio is often preferred over extremes. For instance, a ratio between 0.6 and 0.8 is often considered healthy, but it’s essential to compare it with industry benchmarks and historical performance for a meaningful analysis.
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