Standard deviation is a statistical method to calculate the variability of an output in a manner that allows comparison with similar outputs. It can be used to compare how risky the cash flows of one company are to another company, or to determine whether a company's cash flows have become more or less variable over time. The cash flows are available from the firm's financial statements.
Add the cash flow amounts from each year of the company's financial statements. The cash flow is available on the firm's statement of cash flows.
Divide the total cash flow by the number of years of cash flows for the average annual cash flow.
Subtract the average annual cash flow from each year's cash flow. Square the result by multiplying the difference between the average annual cash flow and the individual year's cash flow by itself. This eliminates any negative numbers.
Sum the results of each year's squared difference between cash flow and average cash flow. Divide the sum by the number of years of cash flows. This is the variance of annual cash flows for the company.
Take the square root of the variance. This is the standard deviation of annual cash flows for the company.
The formula used here is the population standard deviation. The sample standard deviation calculates averages by dividing by one less than the number of years of data available.
- The formula used here is the population standard deviation. The sample standard deviation calculates averages by dividing by one less than the number of years of data available.
Alan Rambaldini has been writing about investing and the financial markets since 2007. He has written about the insurance industry and the Exchange Traded Fund market for Morningstar.com and Morningstar.co.uk. Rambaldini holds a Masters of Business Administration from the University of Notre Dame.