Operating Cash Flow Formula (OCF): Definition, Examples & Calculation
Operating Cash Flow (OCF), also called cash flow from operations, is the amount of cash a business generates from its core operations—selling products or services—within a given period. Unlike net income, which includes non-cash items and accrual accounting adjustments, OCF shows the real liquidity that a company can use to pay bills, invest, and return value to shareholders.
Operating Cash Flow Formula
The general formula for OCF is:
Operating Cash Flow = Net Income + Non-Cash Expenses + Changes in Working Capital
- Net Income: Profit after taxes and expenses.
- Non-Cash Expenses: Depreciation, amortization, or provisions added back because they reduce profit but not cash.
- Changes in Working Capital: Adjustments for accounts receivable, accounts payable, and inventory that affect cash availability.
Operating Cash Flow Formula from EBIT
Another way to calculate OCF starts with EBIT (Earnings Before Interest and Taxes):
OCF = EBIT + Depreciation & Amortization – Taxes Paid +/– Changes in Working Capital
This approach focuses on operational profitability before financing and tax structures, making it popular in financial analysis and valuation models.
Direct vs Indirect Method
- Direct method: Lists all cash receipts (sales) and payments (suppliers, wages, etc.) directly to compute OCF.
- Indirect method: Starts with net income and adjusts for non-cash items and working capital changes.
Both methods produce the same result but differ in presentation on the cash flow statement.
Example of Operating Cash Flow
Imagine a company with the following figures:
- Net Income: $100,000
- Depreciation: $20,000
- Increase in Accounts Receivable: -$15,000
- Increase in Accounts Payable: +$10,000
OCF = $100,000 + $20,000 – $15,000 + $10,000 = $115,000
This means the company generated $115,000 in cash from operations, regardless of accounting adjustments.
Why OCF Matters
- Liquidity Check: A consistently positive OCF shows the business generates enough cash to sustain operations.
- Valuation: Analysts use OCF as the starting point for Free Cash Flow (FCF) and Discounted Cash Flow (DCF) models.
- Debt Coverage: Creditors assess OCF to determine whether a company can cover its liabilities.
- Performance Indicator: Unlike profit margins, OCF avoids accounting distortions and focuses on cash availability.
Operating Cash Flow vs Free Cash Flow
- Operating Cash Flow (OCF): Cash from core business activities.
- Free Cash Flow (FCF): OCF minus capital expenditures (CapEx), showing cash available to investors.
Formula: FCF = OCF – CapEx
Key Insights
- A high OCF to Sales ratio means the company efficiently turns revenue into cash.
- OCF is not the same as EBITDA—EBITDA excludes working capital changes, while OCF includes them.
- Monitoring OCF trends helps detect liquidity risks early, even if reported profits look strong.
OCF vs EBITDA vs FCF (Quick Comparison)
These three metrics look similar but answer different questions about performance, liquidity, and investor cash generation.
Operating Cash Flow (OCF)
- What it shows: Actual cash generated by core operations.
- Formula (indirect): Net Income + Non-Cash Expenses ± Changes in Working Capital.
- Use when: Evaluating day-to-day cash generation and short-term liquidity.
- Pros: Includes working capital; closer to real cash.
- Cons: Can be volatile due to timing of receivables/payables.
EBITDA
- What it shows: Operating earnings before non-cash charges and financing/taxes.
- Formula: Earnings Before Interest, Taxes, Depreciation & Amortization.
- Use when: Comparing operating profitability across firms, screening comps, covenant tests.
- Pros: Simple, capital-structure neutral; useful for multiples (EV/EBITDA).
- Cons: Not cash; ignores CapEx and working capital needs.
Free Cash Flow (FCF)
- What it shows: Cash available to investors after reinvestment.
- Formula (to firm, common): OCF − Capital Expenditures (CapEx).
- Use when: Valuation (DCF), dividend/buyback capacity, debt paydown potential.
- Pros: Direct view of surplus cash after maintaining/growing assets.
- Cons: Sensitive to CapEx timing; company discretion can distort year-to-year.
At a Glance
- Need true operating liquidity? Look at OCF.
- Benchmark core profitability? Use EBITDA.
- Value the business or assess cash to investors? Use FCF (FCF = OCF − CapEx).
Common Pitfalls
- Confusing EBITDA with cash flow (it’s earnings proxy, not cash).
- Ignoring working capital in EBITDA analysis (OCF captures it).
- Reading one good FCF year without checking deferred CapEx or asset sales.
FAQs Operating Cash Flow Formula
Operating Cash Flow (OCF) is calculated by taking net income, adding back non-cash expenses like depreciation and amortization, and adjusting for changes in working capital. Formula:
OCF = Net Income + Non-Cash Expenses + Changes in Working Capital.
Start with EBIT (Earnings Before Interest and Taxes), add back depreciation and amortization, subtract taxes, and adjust for working capital changes:
OCF = EBIT + Depreciation & Amortization – Taxes Paid ± Changes in Working Capital.
Yes. CFO (Cash Flow from Operations) and OCF (Operating Cash Flow) refer to the same metric: the cash generated from a company’s core operating activities.
A ratio greater than 1.0 indicates the company generates enough cash from operations to cover current liabilities. Higher ratios are generally better and signal stronger liquidity.
It is the net cash generated from a company’s main business activities, such as selling products or services, excluding investing and financing activities.
The general cash flow formula is:
Cash Flow = Operating Cash Flow + Investing Cash Flow + Financing Cash Flow.
No. EBITDA excludes working capital changes and non-cash items, while OCF accounts for them, making it a more accurate measure of actual liquidity.
In the cash flow statement, OCF appears under “Cash Flow from Operating Activities” and shows cash generated by day-to-day business operations.
No. Free Cash Flow (FCF) is calculated by subtracting capital expenditures (CapEx) from OCF:
FCF = OCF – CapEx.
A good OCF is consistently positive and growing, meaning the company generates enough cash to fund operations, reinvest, and potentially return value to shareholders.
