Jooste, Leoni, 2006, Cash flow ratios as a yardstick for evaluating financial performance in African businesses, Journal of Managerial Finance, 32(7), 569-576.
Purpose – The purpose of this paper is to compare companies in a developing country with those of a first-world country. For this purpose South African (SA) companies in the chemical, food and electronic industries are to be evaluated on the hand of cash flow ratios and compared with companies in the USA in similar industries.
Design/methodology/approach – Giacomino and Mielke proposed nine cash flow ratios for performance evaluation. Ratios were calculated for companies in the USA in the chemical, food and electronic industries for 1986-1988. Industry norms were calculated for the period, indicating that the potential existed to develop benchmarks for the ratios by industry. Jooste calculated cash flow ratios for listed companies in SA, similar to those calculated by Giacomino and Mielke. The results of the SA companies were then compared with the US companies.
Findings – The comparison revealed some similarities and differences. The cash flow sufficiency ratio showed that the SA industries had enough cash to pay primary obligations, whereas the US industries did not. At the levels of cash generated by SA industries the investments in assets and dividend payouts were more than for US industries. The cash flow generated by assets used in SA is also more than that of the USA but US industries retire long-term debt in a shorter period than SA industries.
Research limitations/implications – The periods used in the comparison differ. Research using the same periods was not available. No information was available on the state of the economies in each country for those periods.
Practical implications – The work done by Giacomino and Mielke is to be recommended. Further studies on the utility of cash flow data would be necessary to develop a set of cash flow-based ratios. Such ratios used in conjunction with traditional balance-sheet and income statement ratios should lead to a better understanding of the financial strengths and weaknesses of a company.
Originality/value – By comparing industries of a developing country with those of a first-world country one may have an indication of the performance of SA companies in a global market.