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Operating Cash Flow

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Cash Flow from Operations

Summary of Operating Cash Flow. Abstract


The Cash Flow from Operations ratio or Operating Cash Flow (OCF) 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.

Cash Flow from Operations
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 OCF, it may be using aggressive accounting techniques. If the OCF ratio is substantially less than one or decreasing / poor over a longer period of time, cash flow problems are likely.

An OCF calculation can be done in two formats:

1. Divide OCF by income from operations (yields a more accurate view of the proportion of cash being spun off from ongoing operations)

2. Divide the 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.

👀TIP: On this website you can find much more about analyzing cash flows from operations!

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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