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 The Cash Flow from Operations
ratio (also: Operating Cash Flow) is used to determine the
extent to which cash flow differs from the reported level of either
Operating Income or Net Income. (Under both IFRS and US GAAP a company
can still easily report healthy income figures, even while its cash
resources are poor).
In other words: it is a check on the
quality of a company's earnings. It's arguably a better measure of a
business's profits than earnings, because a company can show positive
net earnings and still not be able to pay its debts.
A difference in this ratio and
Reported Earnings is indicative of substantial noncash expenses or sales
in the reported income figures and if
a firm reports record earnings but
negative Operating Cash Flows, it may be using aggressive accounting
techniques. If the Cash Flow
from Operations ratio is substantially less than one or decreasing /
poor over a longer period of time, cash flow problems are likely.
An Operating Cash Flow calculation
can be done in two formats:
1. Divide operational cash flow by
income from operations (yields a more accurate view of the proportion of
cash being spun off from ongoing operations)
2. Divide cash flow from all
transactions (including extraordinary items) by net income (shows the
impact of any transactions that are not related to operations)
Both calculations measure the cash
generated from operations, not counting capital spending or working
capital requirements.
Compare with Cash Flow from Operations:
Dividend Payout Ratio
| Debt to Equity Ratio
| CFROI |
Cash Value Added |
Cash Ratio |
Economic Value Added
More
Ratios and Financial Models
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