Enter the cash flow from operating activities and the net income into the calculator to determine the quality of income ratio. This ratio helps assess the quality of a company’s earnings in relation to the cash generated from its operations.
Quality of Income Ratio Formula
The following formula is used to calculate the quality of income ratio:
QIR = CFO / NI
Variables:
- QIR is the quality of income ratio
- CFO is the cash flow from operating activities ($)
- NI is the net income ($)
To calculate the quality of income ratio, divide the cash flow from operating activities by the net income.
What is a Quality of Income Ratio?
The quality of income ratio measures the proportion of income that is associated with cash or cash equivalents, indicating the ability of a company to turn its earnings into cash. A higher ratio suggests that a larger portion of a company’s income comes from its core business operations, which is generally seen as a positive indicator of financial health.
How to Calculate Quality of Income Ratio?
The following steps outline how to calculate the Quality of Income Ratio:
- First, determine the cash flow from operating activities (CFO).
- Next, determine the net income (NI).
- Use the formula QIR = CFO / NI.
- Finally, calculate the Quality of Income Ratio (QIR).
- After inserting the variables and calculating the result, check your answer with the calculator above.
Example Problem:
Use the following variables as an example problem to test your knowledge.
Cash flow from operating activities (CFO) = $50,000
Net income (NI) = $30,000
