Operating Cash FlowOCF
Operating cash flow is the cash generated by a company’s core business in a period, shown in the cash flow statement. When it is persistently below reported profit, analysts look closely at the quality of those earnings.
Operating cash flow is the cash a company's main business actually brings in during a period. It sits in the first section of the cash flow statement. When it keeps falling short of reported profit, analysts ask whether those profits are real. Presentation rules differ by country and accounting standard.
- Category
- Fundamentals and Macroeconomics
- Reading time
- 3 min
- Also called
- Cash flow from operations, Cash from operating activities, Net cash from operating activities
- Updated
Operating cash flow in plain words
Under IFRS, operating activities are a company's main money-making activities, plus anything that isn't investing or financing.1
This part of the cash flow statement usually starts from net income and works back to the cash the business actually brought in or used.2
It adds back non-cash items such as depreciation, then adjusts for cash tied up in or released from working capital.2
How operating cash flow is built (indirect method)
Start from profit
Start from profit and adjust for non-cash items (the indirect method).1
Add back non-cash costs
For example, adding back depreciation expenses.2
Adjust for receivables
Sales not yet collected reduce cash.
Adjust for inventory and payables
Building stock uses cash; delaying payments adds cash.
Arrive at operating cash
The result is the cash the business actually generated or used in its operations.2
Compare with net income
A persistent gap is a warning sign worth investigating.
Worked examples
Example 1 — Depreciation add-back
Cash above profitA hypothetical firm reports net income of 40 with depreciation of 15 (millions).
| Net income | 40 |
| Add depreciation | +15 |
| Operating cash flow | 55 |
Depreciation is a non-cash item, so it is added back to net income.2
Example 2 — Slow customers
Earnings-quality flagA hypothetical firm reports net income of 40 but receivables rise by 35.
| Net income | 40 |
| Receivables increase | −35 |
| Operating cash flow | 5 |
The reconciliation from net income to the actual cash the company received shows profit not turning into cash.2
Example 3 — Steady business
High qualityA hypothetical utility shows operating cash flow of 120 against net income of 90 for five years.
| Average OCF | 120 |
| Average net income | 90 |
Its principal revenue-producing activities reliably generate more cash than reported profit.1
Operating cash flow vs net income
| Aspect | Operating cash flow | Net income |
|---|---|---|
| Basis | Cash received and paid | Accrual accounting |
| Depreciation | Added back | Deducted |
| Working capital changes | Included | Not included |
| Manipulation risk | Lower | Higher |
Where operating cash flow is used
Earnings quality
Compare with Earnings over several years.
Dividend safety
Cash, not profit, pays the Dividend.
Debt capacity
Lenders check cash cover for Leverage.
Valuation
Cash-based ratios complement the Price-to-Earnings Ratio.
Advantages and disadvantages
Advantages
- Harder to flatter than accounting profit.
- Shows real cash generation.
- Reveals working-capital strain.
Disadvantages
- Can swing with timing of payments.
- Excludes capital spending.
- Classification of interest and dividends can vary.
- Accounting standards differ by country.
Going deeper
Read as far as you need. Each level builds on the one before it.
What counts as operating
Beginner
Operating cash flow covers the core business, as opposed to investing and financing.1
The indirect method
Intermediate
Most companies start from profit, strip out non-cash items and then adjust for working-capital changes.1
Quality of earnings
Advanced
Since the section bridges reported profit to real cash, profits that rarely turn into cash can be a sign of aggressive revenue recognition.2 IFRS and US GAAP classify some items differently.
Common mistakes
Treating OCF as free cash flow
Capital spending still has to be paid.
Judging one year
Timing effects can reverse.
Ignoring receivables growth
Rising receivables can hide weak cash.
Comparing different standards blindly
Rules differ by country.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- OCF is cash from the core business.
- It starts from net income under the indirect method.
- Non-cash costs are added back.
- Working-capital changes matter.
- Standards differ by country.
Frequently asked questions
Can operating cash flow be negative?
Is OCF the same as EBITDA?
Is OCF presented the same everywhere?
Further learning
- Earnings
How reported profit is measured.
- Payout Ratio
Can cash cover the dividend?
- Leverage
Cash cover for debt.
- Fundamental Analysis
Putting statements together.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- IFRS Foundation. IAS 7 Statement of Cash Flows (opens in a new tab) Checked .
- SEC. Beginners' Guide to Financial Statements (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.