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)+
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
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.