Operating Cash Flow (OCF)

Definition

The financial investing term operating cash flow refers to the money a company is able to generate through normal business operations.  Operating cash flow (OCF) is a metric that's closely tracked by both the company's financial decision makers as well as investor-analysts.

Calculation

Operating Cash Flow = Net Income + Non-Cash Items + Net Change to Working Capital

Where:

  • Non-Cash Items:  includes expenses such as depreciation, amortization, provisions for deferred income taxes, cost of removal, and non-cash employee benefits expenses.
  • Net Change to Working Capital:  includes the net change to certain current assets and current liabilities.  For example, operating cash flow would reflect the net change to items such as accounts receivable, materials and supplies, inventory, and prepayments.

Explanation

The cash a company generates allows it to pay for its operating expenses, return money owed to lenders, and expand its business.  As is the case with free cash flow, operating cash flow is considered by many investor-analysts to be a superior measure to net income, since it's more difficult to manipulate through less-than-reputable accounting practices.  For example, a company's income statement may indicate it is generating profits; however, if it runs out of cash, the company may wind up in a bankruptcy proceeding.

Operating cash flow takes the net income of the company and adjusts it for non-cash costs such as depreciation / amortization as well as expenses associated with funds such as employee benefits.  The measure also accounts for the net change to working capital, which is developed from the balance sheet.  Generally, working capital is the difference between current assets and current liabilities.  Examples of current assets include accounts receivable, inventory and prepaid expenses, while examples of current liabilities include maturing short-term debt and accounts payable.

A company's free cash flow (FCF) can be determined by subtracting capital expenditures from operating cash flow.  While it's acceptable under certain conditions for FCF to be negative, the OCF of a financially-sound company will always be a positive value.

Example

Company A's income statement indicates net income of $10,000,000, which includes a depreciation expense of $2,500,000, and amortization costs of $1,500,000.  Company A's balance sheet indicates a year-over-year net decrease in working capital of $2,000,000.  The operating cash flow for Company A would be calculated as follows:

= $10,000,000 + $2,500,000 + $1,500,000 - $2,000,000
= $12,000,000

Related Terms

income statement, working capital, net income, cash flow, depreciation, amortizationfree cash flow, cash flow per share, free cash flow per share