The Importance of Operating Cash Flow

By Stock Research Pro • April 1st, 2009

Operating Cash Flow or “cash flow from operating activities” is the cash a company generates through the operations of its business. The operating cash flow is generally defined as revenues minus the costs associated with the company’s operations. Because operating cash flow adjusts for liabilities, depreciation, and receivables, it is viewed as a more accurate measure of how much cash a company generates than more traditional measures of profitability, such as net income.

The Importance of Cash Flow

The amount of cash a company generates is an important measure of its overall financial health. Through normal business operations, cash comes into the business as income and goes out as expenses. This flow, known as cash flow, is core to any business and directly impacts its ability to remain solvent and generate profits.

The Cash Flow Statement

Operating cash flow can be found in the company’s cash flow statement or “statement of cash flows”. Along with the balance sheet and the income statement, the cash flow statement is one of the company’s primary financial reports. The cash flow statement shows the money coming into and going out of the business. As a tool for fundamental analysis, the cash flow statement helps determine the short-term viability of a company, particularly its ability to pay its bills.

Operating Cash Flow

Operating Cash Flow can be calculated as:

OCF = EBIT + Depreciation - Taxes

Operating cash flow is derived from the company’s net income. OCF can provide a better measure of a company’s profits than net income because, under GAAP (Generally Accepted Accounting Principles) accounting rules, cash flow is harder to manipulate.

If more money comes into the company than goes out of it, then the company is said to have positive cash flow. If the reverse is true, then the OCF is a negative number. It is important for investors to look specifically at cash flow because a company might show positive net earnings on its income statement and still lack the ability to pay its debts.

Investors can also use OCF to verify the quality of a company’s earnings. If the company reports solid earnings but negative cash, it may be using aggressive accounting techniques.


The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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