The Foolish Flow Ratio is one of the most useful performance measures dreamed up by The Motley Fool. The Foolish Flow Ratio quantifies how well a company is managing their working capital. This measure appeals to my contrarian nature, because it treats inventories* and accounts receivable, traditionally considered assets, as liabilities. Conversely, accounts payable, generally considered a liability, is treated as an asset. This contrarian thinking is justified, because accounts receivable are really interest free loans to customers, while accounts payable are interest free loans from suppliers.

Watch out for exploding accounts payable while receivables remain steady - this means management is shafting suppliers to make their numbers look good. Management often gets away with this because equities traders are dumbasses and almost never look beyond net income and earnings per share.

To determine the Foolish Flow Ratio, subtract cash from current assets and then divide by current liabilities minus short term debt. This a fairly easy measure to calculate, because all the necessary inputs are found on the consolidated balance sheets.

The whole point of being in business is to have more loot coming in the front door than going out the back door. This is why the Foolish Flow Ratio gives the thinking investor an edge - it provides a way to measure this. According to The Motley Fool, a ratio below 1.25 is acceptable, while 1.00 or less is preferred. A ratio below 1.00 means a company has more cash coming in than going out.

Railroads are a bad example, as they almost always ace this measure. This is because they have almost no inventory fucking up their flow. However, I have the spreadsheet made for railroads, so here is the table:

Both Norfolk Southern (NSC) and CSX are well above the industry average. Remember, lower is better for the Foolish Flow Ratio. This is not particularly surprising in the case of CSX, as alert Propeller Skies readers have likely figured out CSX sucks wind like hookers on Ponce suck dicks. While NSC is above both the industry average and its own five year average, the year over year trend is headed down, which is the correct direction. In contrast, CSX’s Foolish Flow Ratio is above its five year average and increasing year over year.

Union Pacific (UNP) is another surprise. Usually vying with CSX for first place in the piss poor management hall of shame, UNP managed to pull off the best Foolish Flow Ratio in the industry two years in a row. However, the year over year trend is up, which is the wrong direction, so I am not about to call a turnaround. Also, UNP’s current Foolish Flow Ratio is only slightly lower than their five year average - another argument against improving management.

See also: Cash King Margin, the next post in the series, Quick Ratio, the previous post in the series, and Railroad Performance Measures: Operating Ratio at the beginning.

notes:

* Alert Prizzo Skeezy readers will recall the quick ratio considers inventories worthless, a similar treatment.