Operating Cash Flow

Operating cash flow is the cash inflow from ongoing business activities. It shows how much real cash the core business generates, independent of investments and financing. Stable operating cash flow is a sign of a healthy business.

In the cash flow statement it is the first of three sections alongside investing and financing activities and is normally derived indirectly: starting from net income, non-cash expenses and income such as depreciation and movements in provisions are added back or deducted, and the change in working capital is taken into account. That last item explains the most common divergences from reported profit: a growing company ties up cash in inventory and receivables, so strong profit can coincide with weak cash inflow, while a shrinking business releases capital and looks good in the short term. The measure is therefore informative in combination with EBITDA, expressed as cash conversion, and over several years. For lenders operating cash flow is the starting point for debt service capacity, because interest and principal are paid from cash and not from accounting profit.

In international comparisons it should be noted that the allocation of interest and taxes to the sections of the cash flow statement can differ between accounting standards. IAS 7 permits either a direct or an indirect presentation. In practice the indirect method prevails, starting from net income and adjusting for non-cash items and changes in working capital. The figure only becomes meaningful over several years, because one-off effects such as extended payment terms can markedly improve a single year without any change in the underlying business. A common check is to compare it with EBITDA over several periods: if operating cash flow persistently falls short, this points to earnings quality that warrants critical scrutiny.