What is Operating Cash Flow?
Operating cash flow (OCF) is a measure of the cash generated or used by a company in a given period solely related to core operations. OCF is not the same as net income, which includes transactions that did not involve actual transfers of money (depreciation is a common example of a noncash expense that is part of net income but not OCF). OCF is also not the same as EBITDA or free cash flow.
Operating Cash Flow Formula
A statement of cash flows typically breaks out a company's cash sources and uses for the period into three categories: cash flows from operations, cash flows from investing activities, and cash flows from financing activities. OCF is generally calculated according to the following formula:
Operating Cash Flows = Net income + Noncash Expenses (Usually Depreciation Expense) + Changes in Working Capital
Because working capital is a component of OCF, investors should be aware that companies can influence cash flow by lengthening the time they take to pay the bills (thus preserving their cash), shortening the time it takes to collect what's owed to them (thus accelerating the receipt of cash), and putting off buying inventory (again thus preserving cash).
Why Operating Cash Flow Matters
No matter how one measures it, cash flow is what helps companies expand, develop new products, buy back stock, pay dividends or reduce debt. This is why some people value cash flow -- particularly OCF -- more than just about any other financial measure out there, including earnings per share. Thus, revenues, overhead and efficiency are big drivers of cash flow.
Without positive cash flow, a company may have to borrow money to do these things, or in worse cases, it may not stay in business. It is important to note, however, that having negative OCF for a time is not always a bad thing. If a company is a net spender of cash for a time because it is building a second manufacturing plant, for example, this could pay off in the end if the plant generates more cash. On the other hand, if the company has a negative OCF because it made a poor acquisition or other investment, then the long-term benefit might not materialize.
Investors often hunt for companies that have high or improving OCF but low share prices -- the disparity often means the share price will soon increase.
