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Operating Cash Flow (OCF)

Operating Cash Flow (OCF) is arguably one of the most critical metrics you can use to understand a company’s financial health. Unlike net income, which includes non-cash items like depreciation and amortization, OCF provides a crystal-clear picture of how much actual cash a company generates from its primary business activities. Think of OCF as the heartbeat of a company’s day-to-day operations.

What is Operating Cash Flow?

Operating Cash Flow refers to the cash generated by a company’s normal business operations over a specific period, typically reported quarterly or annually. It helps investors and analysts see whether a company can generate sufficient cash flow to maintain and grow its operations. This metric excludes investing and financing activities, focusing solely on the company’s core business activities.


The formula to calculate Operating Cash Flow is straightforward:

OCF=Net Income+Non-cash ExpensesChanges in Working Capital\text{OCF} = \text{Net Income} + \text{Non-cash Expenses} - \text{Changes in Working Capital}


  • Net Income\text{Net Income}: The company’s profit after all expenses, taxes, and costs.
  • Non-cash Expenses\text{Non-cash Expenses}: Expenses like depreciation and amortization that don’t involve an actual cash outlay.
  • Changes in Working Capital\text{Changes in Working Capital}: Changes in current assets and liabilities that reflect short-term operational needs.

Example Calculation

Let’s say Company ABC has the following financial data for the year:

  • Net Income: $500,000
  • Depreciation: $100,000
  • Amortization: $50,000
  • Increase in Accounts Receivable: $20,000
  • Decrease in Accounts Payable: $10,000

Using the OCF formula:

OCF=500,000+100,000+50,000(20,000)(10,000)\text{OCF} = 500,000 + 100,000 + 50,000 - (20,000) - (10,000) OCF=500,000+150,00030,000\text{OCF} = 500,000 + 150,000 - 30,000 OCF=620,000\text{OCF} = 620,000

So, the Operating Cash Flow for Company ABC is $620,000.

Why is OCF Important for Investors?

Operating Cash Flow is crucial for several reasons:

  1. Liquidity Insight: Unlike net income, which can be skewed by accounting adjustments, OCF reveals the company’s actual cash position.
  2. Operational Efficiency: Consistent positive OCF indicates efficient management and a well-running core business.
  3. Investment Capability: Companies with strong OCF are better positioned to fund their growth, reinvest in operations, pay dividends, or buy back shares.
  4. Debt Management: Strong OCF can indicate a company’s ability to service its debt, reducing bankruptcy risk.


In essence, Operating Cash Flow acts like a spotlight, highlighting how well a company converts its sales into real cash. Investors often look at OCF trends over multiple periods to gauge the sustainability of a company’s operations and to make informed decisions.