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:
Divide operational cash flow by income from operations (this offers
a more accurate view of the proportion of cash being spun off from
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.