The operating cash flow of a company, simply put, is the cash a company generates from its core business operations. It shows how much cash the company is able to generate from selling its product or service after paying for operating expenses and taxes.
While the bare-bones definition of operating cash flow is quite straightforward, the concept demands a more nuanced explanation to truly understand its significance. The operating cash flow is derived from the company's net income, with adjustments made for non-cash expenses (like depreciation and amortization) and changes in working capital.
Operating cash flow is an important indicator of a company's financial health. Unlike net income, which can be influenced by accounting practices, operating cash flow is a hard measure of cash in and cash out, and is therefore a more reliable indicator of liquidity and solvency.
It's important to remember that a high operating cash flow doesn't necessarily mean a company is profitable, and vice versa. A company might be profitable on paper, but if it's not generating enough cash from its operations, it could be in financial trouble.
For General Motors, operating cash flow is calculated by taking the net income and adding back non-cash expenses like depreciation of machinery and adjusting for changes in working capital such as increase in inventory or decrease in payables.
Amazon's operating cash flow is calculated by adjusting its net income for non-cash expenses like depreciation of servers and changes in working capital such as increase in accounts receivable or decrease in accounts payable.
For Verizon, operating cash flow is derived by adjusting the net income for non-cash expenses like depreciation of network infrastructure and changes in working capital such as increase in prepaid expenses or decrease in accrued expenses.