Operating Cash Flow Calculator

The operating cash flow calculator is a handy tool that allows you to calculate the real money a company is getting from operations; in more sophisticated words, it gives you the net cash flow from operating activities. Operating cash flow (OCF) is one of the primary fundamental values that any business owner and investor need to understand.

Because of that, in this article, we will cover what is operating cash flow, how to calculate it by using the OCF formula, and finally, how to interpret the cash flows for analyzing future company growth.

The OCF represents the real cash a company received during the fiscal period because of operating activities. Providing services, selling inventory, any deferred revenue, and costs related to future contracts are all examples of operating activities that may generate a cash flow for the company. That's it, as simple as it sounds.

From that definition, we can say already that the operating cash flow is a more reliable profitability value than net income because it shows real money. As explained in the free cash flow calculator, net income is discounted by items that are not real cash, such as depreciation, amortization, and stock-based compensation expenses, among others.

Because of this problem, investors tend to rely on EBITDA. However, even EBITDA does not take into account important cash flows variations like changes in inventory levels or accounts receivables/payables.

Consequently, cash flow from operations is crucial for business owners and investors because it shows if the company can maintain itself and grow based on real money transactions.

Several elements are included in the operating cash flow formula. Here they are expressed in two main equations:

where:

• $\small \rm{OFC}$ — Operating cash flow
• $\small \rm{NI}$ — Net income
• $\small \rm{D}$ — Depreciation
• $\small \rm{A}$ — Amortization
• $\small \rm{\Delta OWC}$ — Change in the operating working capital, which we calculate as the change of inventory ($\small \rm{\Delta Inv}$), accounts receivables ($\small \rm{\Delta AR}$), and accounts payable ($\small \rm{\Delta AP}$)
• $\small \rm{ITP}$ — Income tax payable
• $\small \rm{Net_{other\ CF}}$ — Net of other cash flows: This item can include cash flows from deferred revenues and stock-based compensation, among others.

Note we are adding back depreciation and amortization because it was an accounting cash flow, not a real one. Regarding the change in operating working capital, we have the following:

• Change in inventory ($\small \rm{\Delta Inv}$): It includes the acquisition and consumption of inventory. It is usually calculated by the difference between inventory levels:

where:

$\small \rm{Inv_{beg}}$ — Refers to inventory level at the beginning of the period; and

$\small \rm{Inv_{end}}$ — Refers to inventory level at the end of the period.

An increase in inventory levels ($\small \rm{Inv_{end}>Inv_{beg}}$) represents a cash out-flow because the company spent money on getting more inventory. That is why the equation result has to be a negative value. On the other hand, a decrease in inventory levels ($\small \rm{Inv_{end}<Inv_{beg}}$) means an operating cash in-flow because inventories were consumed or sold. Thus, it has to be a positive value.

• Change in accounts receivables($\small \rm{\Delta AR}$): This item refers to the money that clients have to pay to the company for the goods or services provided. Because this is not a cash item, we check only the variation in it:

where:

$\small \rm{AR_{beg}}$ — Refers to accounts receivables at the beginning of the period; and

$\small \rm{AR_{end}}$ — Refers to accounts receivables at the end of the period.

Like inventory levels, an increase in accounts receivables ($\small \rm{AR_{end}>AR_{beg}}$) means more money in debt to the company that is considered a cash out-flow; thus, our math value has to be negative. On the other hand, a decrease in accounts receivables ($\small \rm{AR_{end}<AR_{beg}}$) points to customer's payments, indicating positive operating activities cash flow.

• Change in accounts payable ($\small \rm{\Delta AP}$): Contrary to the previous one, this item refers to the company's debt with its providers/suppliers.

where:

$\small \rm{AP_{beg}}$ — Refers to accounts payables at the beginning of the period; and

$\small \rm{AP_{end}}$ — Refers to accounts payables at the end of the period.

Notice that if the accounts payable increases ($\small \rm{AP_{end}>AP_{beg}}$), we have a cash inflow because raw materials are provided to the company without being paid yet. It refers to cash that has not left the company, a positive cash flow. Contrastly, if accounts payable decreases ($\small \rm{AP_{end}<AP_{beg}}$), cash leaves the company to pay those debts, which is a negative cash flow.

In case you only have the exact amounts for inventories, accounts receivables, and payables from the balance sheet, you still can get a reliable proxy for the change in operating working capital. You can do so by opening the section of Balance changes of our incredible operating cash flow calculator. It is critical to mention that variations of the mentioned items throughout the year can be complicated, so it will not be 100% accurate.

Moreover, income tax payable represents the real cash used to cover all taxes, including the ones coming from investing and financing. Taxes registered in the income statement are only related to the goods or services provided.

Lastly, we've added an extra item: net of other cash flows. It represents all additional operating cash flows that are exclusive to each business. For example, we would put here the deferred revenues like agreements for subscriptions in the case of a SaaS (Software as a Service) company.

In short, we want to see a cash flow from operating activities that is positive and growing. Here it is handy to use the CAGR calculator and get the growth rate of the operating cash flow because it would give us a real sense of the rate of evolution of our company.

Besides, net cash flow from operating activities can give you an insight into the future of a company earlier than other financial values like earnings per share. Here we will discuss two situations:

• Net operating cash flow increasing and higher than net income: A cash flow from operating activities in these conditions can only mean a successful company that is generating more and more money. Even if the net income is negative, an OCF >0 can indicate near-future accounting profitability.

• Net operating cash flow decreasing and lower than net income can only mean bad times for the business. Basically, the company is earning less and has fewer profits. In cases where cash from operating activities is negative, even if the company still has a positive net income, you should get away from it.

Another important usage we give to the cash flow from operating activities is for debt analysis. Financial tools like interest coverage ratio calculator or cash flow to debt ratio calculator can provide a very accurate picture of a company's capability to deal with debt, even more precise than EBIT.

Let's review an example of cash flow from operations calculation. The following company: Fortinet (NYSE: FTNT) is a cybersecurity company that provides anti-hacking equipment and software for enterprises with different businesses connected through the web.

By reviewing its 2019 financial statements, we find the following information:

$\small \rm{ NI = 326.5 \ million \ USD }$

$\small \rm{ D + A = 61.6 \ million \ USD }$

$\small \rm{\Delta \ inventory = -48.5\ million \ USD }$

$\small \rm{\Delta \ AR = -96.7 \ million \ USD }$

$\small \rm{\Delta \ AP = 7.7 \ million \ USD }$

$\small \rm{ITP = -18.8 \ million \ USD }$

For the net of other cash flows, we will sum up all the items not mentioned above. Then we get:

$\small \rm{Net_{other\ CF} = 576.2 \ million \ USD }$

Note that in this item, we are taking into account relevant cash flows like stock-based compensation (174.1 USD million) and deferred revenue(446.7 USD million). Both, as mentioned above, are very business-type-specific.

As explained on page 91 of the report, the first one has previously been considered as a cost expense that, in reality, is a non-cash item since it represents payments to employees in stock options or equivalents. The second one relates to services that have been invoiced but are not considered as revenue because they have not been entirely executed.

Finally, and by using our cool operating cash flow calculator, we get:

$\small \rm{\Delta \ OWC= -137.5 \ million \ USD }$

$\small \rm{OFC = 808 \ million \ USD }$

If we conduct the same exercise for the last 5 years, we will find out the following trend:

*TTT= twelve trailing months

It is amazing to see how much the operating cash flow has grown from 2015 to this day. As a consequence, the market capitalization of the company has risen from 5.05 billion USD to 21.1 billion USD, providing a return on investment of 323%.

Finally, operating cash flow is not the only financial value we have to keep in mind when investing. Consequently, we invite you to check out our other fantastic financial calculators.