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Operating cash flow

Operating cash flow (OCF), usually more formally described in accounts as "cash inflow from operating activities", is the amount of actual cash made by a company's business, generally defined as revenues less all operating expenses, but calculated through a series of adjustments to net income. The OCF can be found on the statement of cash flows.

The formula for Operating Cash Flow is:

      OCF=Earnings Before Interest & Taxes (EBIT)+ Depreciation-Taxes

Operating Cash Flow tells how much cash a company has been able to generate from the operations of its business. Since it adjusts for liabilities, receivables, and depreciation it is a more accurate measure of how much cash a company has generated than measures of profitability such as net income. As such, a massive and/or unexpected discrepancy between the net income and operating cash flow of a company could be indicative of disproportionate non-cash income. For example: A company with a lot of machinery (fixed assets) may have low net income due to depreciation; however the company does not pay for depreciation with cash, and, assuming everything else remains the same, the operating cash flow for the company would be higher than its net income.

Since cash flow is harder to manipulate under GAAP than net income, some investors may find operating cash flow to be a better reflection of reality than the net income. If a firm reports high earnings (net income) but negative Operating Cash Flows, there could potentially be fraud involved in the calculation of the net income figures (use of aggressive accounting procedures).

Operating Cash Flow can tell investors of companies that are churning out more cash faster than they are bringing in cash. How do you find the Operating Cash Flow number? You can look it up in the Statement of Cash Flows in the Balance Sheet section of a firm's statements. A positive Operating Cash Flow number shows a healthy company, while a negative operating cash flow shows signs of cash flow problems.

Given that companies require cash to run its everyday operations, cash flow from operations are likely to highlight any liquidity issues that a company might have. If the Cash Flow from Operations Ratio is less than 1, or steadily declining over a longer period of time, this can show signs of operation inefficiencies and cash flow problems.


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