Cash Flow from Operations

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Checking the quality of a company's earnings. Explanation of Cash Flow from Operations ratio.

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What is Cash Flow from Operations? Definition

The Cash Flow from Operations ratio (also: Operating Cash Flow) is used to determine the extent to which cash flow differs from the reported level of either Operating Income or Net Income. (Under both IFRS and US GAAP a company can still easily report healthy income figures, even while its cash resources are poor).

In other words: it is a check on the quality of a company's earnings. It's arguably a better measurement of a business's profits than earnings, because a company can show positive net earnings, and still not be able to pay its debts.


A difference in this ratio and Reported Earnings is indicative of substantial noncash expenses or sales in the reported income figures. If a company reports high earnings but negative Operating Cash Flows, it may be using aggressive accounting techniques. If the Cash Flow from Operations ratio is substantially less than one or decreasing / poor over a longer period of time, cash flow problems are likely.


Cash Flow from Operations calculation

An Operating Cash Flow calculation can be done in two formats:

  1. Divide operational cash flow by income from operations (this offers a more accurate view of the proportion of cash being spun off from ongoing operations)
  2. Divide cash flow from all transactions (including extraordinary items) by net income (this shows the impact of any transactions that are not related to operations)

Both calculations measure the cash generated from operations, not counting capital spending or working capital requirements.

Cash Flow from Operations explained

Cash Flow from Operations Forum
  Reconciliation of the Cash Flow from Operations
Why do you think it is necessary to do a reconciliation for the cash flow from operations?...
     
 
  Net Income vs. Income from Operations?
What is the difference between Net Income and Income from Operations?...
     
 
  How to create a Cash Flow Statement?
How to prepare a Cash Flow Statement?...
     
 
  Valuation of Start Ups
With a negative EPS & negative cash flow due to either start up business or capital investment, what other way is feasible for valuing a company?...
     
 

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Usage (application): Things to do when Liquidity is too High
 
 
 

Net Income vs. Cash Flow

Cash Flow from Operations is a much better metric to assess a company’s financial health than Net Income, as cash flows are much harder to manipulate ...
Usage (application): Financial Statement Analysis
 
 
 

Limitations of Cash Flow From Operations

Limitations of Cash Flow From Operations:
1. Cash from operations does not include a charge for use of a firm’s operating capacity and thu...
Usage (application): Financial Statement Analysis
 
 
 

Accelerating Cash Flow Velocity

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- Optimize the sales cycle by allowing adjustments for seasona...
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Resources - Cash Flow from Operations Premium

Cash Flow from Operations Diagram

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Earnings Management

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Usage (application): Real Activities Manipulation
 

Cash Flow from Operations

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Usage (application): CEO Compensation
 
 

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Compare with Cash Flow from Operations:  Dividend Payout Ratio  |  Debt to Equity Ratio  |  CFROI  |  Cash Value Added  |  Cash Ratio  |  Economic Value Added


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