ankitgokani
Ankit Gokani
he 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 measure 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 and if a firm reports record 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.
An Operating Cash Flow calculation can be done in two formats:
1. Divide operational cash flow by income from operations (yields 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 (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.
source:Cash Flow from Operations
In other words: it is a check on the quality of a company's earnings. It's arguably a better measure 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 and if a firm reports record 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.
An Operating Cash Flow calculation can be done in two formats:
1. Divide operational cash flow by income from operations (yields 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 (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.
source:Cash Flow from Operations