The cash flow statement is one of the three key financial statements that public companies are required to release quarterly says Aron Govil. It provides a detailed snapshot of how a company is doing financially at a point in time, detailing its sources of cash and the various ways it spends money.
One of the main components of this statement is operating cash flows. These are earnings before interest, taxes, depreciation and amortization (EBITDA) that exclude non-cash activities. For instance, depreciation isn’t an outlay of cash but rather a reflection of the decline in value of an asset over time, while amortization involves reducing intangible assets on a balance sheet to reflect their diminished worth after being used for some period.
Operating cash flow can be calculated by subtracting capital expenditures from operating income or by taking net income less other revenue/expenses not associated with daily operations. However you calculate it, this is a key metric for investors and analysts to follow, as it shows how effectively managers can generate cash from their enterprise.
Assume the following:
- Net income = $25 million
- Capital expenditures = $4 million
- Other revenue/expense line items = ($1) million (in reality these other line items would be much larger but are being treated here simply for example purposes).
- Operating cash flow in this case would be equal to $27 million ($25 + 4 – 1). This means that total net cash generated by the company’s operations was $27 million after accounting for capital expenditures explains Aron Govil. Another way of looking at operating cash flows is that they represent how much money comes into a business to expenses, without including things like taxes and long-term investments.
- Net income, meanwhile, is determine by starting with net sales/revenue and then subtracting expenses along the way until you get to operating cash flows. The result is consider a pre-tax number; this means that it doesn’t take into account other transactions such as capital expenditures, dividends paid or debt repayments.
- Operating cash flow is one of three key numbers you should be checking. In your company accounts each quarter (the other two being revenue and earnings per share). It’s important to consider the trends over several quarters in order. To see if there are any deviations from the norm, and whether they’re positive or negative changes. These different factors play a role in determining where a stock might be head. So it’s important to keep tabs on them.
- Keep in mind that operating cash flows don’t include capital expenditures. Or other sources of funding such as loans or issuing bonds. They also exclude non-cash items like depreciation and amortization, which reflect the decline of value of assets over time. For these reasons, net income is very often higher than operating cash flows. Since it takes into account these additional line items.
- However you calculate the number, though, this is still an important figure for investors and analysts alike to track. Particularly because companies with strong operating cash flow are usually more sustainable (and thus attractive). Than businesses who struggle generating enough money each year to cover their expenses. If your business operates mostly on credit or if there’s a strong likelihood. You won’t be able to cover your bills. Without taking on more debt, then this is something that should definitely give you pause says Aron Govil.
- In the long term, over several quarters say. Investors will want to see a company’s operating cash flow go up while net income goes down. This shows that managers are successfully generating earnings from their business and not spending. So much on capital expenditures or other items outside of day-to-day operations. Sometimes it makes sense for companies to pay out dividends even if they have positive operating cash flows. Because they’re struggling with net income. In these cases having some extra money on hand can help boost shareholder value. By either buying back shares or reinvesting in the business itself.
Operating cash flow is a key number that tells investors. How much money the business has generated from its regular operations explains Aron Govil. This includes revenues, expenses and all other events that impact the business before long term investments. Taxes and other things are take into account. Operating cash flows help investors determine whether a company is sustainable. And whether its stock is a strong investment in the long term.