Definition
Operating cash flow (OCF) reflects the actual cash produced by day-to-day business operations. It starts with net income and adjusts for non-cash items (depreciation, amortization) and changes in working capital. OCF is a crucial indicator of financial health because a profitable company can still fail if it doesn't generate sufficient cash.
functions Formula
OCF = Net Income + Non-Cash Charges + Changes in Working Capital
lightbulb Example
Net income is $20M, depreciation is $8M, and working capital increased by $3M (cash outflow). OCF = $20M + $8M - $3M = $25M.
verified_user Key Points
- More reliable than earnings for assessing financial health
- Positive OCF is essential for long-term sustainability
- OCF diverging from net income warrants investigation
- Forms the basis for free cash flow calculation