FSA: earnings supported by cash flow

Text book question: V2.473, q15: why if operating cash flow before tax and interest to operating income rises steadkily , the it indicate that earnings are supported by cash flow…? does it necessary to be larger than 1? Thanks.

The increasing ratio just means that Cash flow has been increasing as EBIT increases. it doesn’t necessarily need to be a ratio of 1 or larger than 1. in the case of enron, their problem was actually Cash flow was decreasing while EBIT increases. This indicate low quality of earnings—>cash flow not enough to cover EBIT