Investing for Beginners , investing

Operating cash flow or ‘cash flow from operations’ (CFFO) is one of the most important among financial indicators and is used to measure company’s results in cash terms. While net income or operating income are reasonable indicators to measure the financial success of the company over some period but the problem is that they are too much dependent on accounting standards and can be manipulated easier. 

Operating cash flow is especially important in situations when the company is in financial trouble and could use its accounting art to improve the results in income statement, which is completely possible.

How to find operating cash flow

Operating cash flow always has to be stated in cash flow statement and shows how much of cash company has earned (or lost) during the period of the statement. Company with positive and large cash flow from operations is much healthier financially. But even operating cash flow can mislead. It is needed to look at sources of the cash flow, whether they come from sustainable source, but not for example from changes in working capital. 

How to analyze operating cash flow

This indicator is useful in many cases, but not for all the companies. It may be harder to interpret the cash flow of the companies of which business is based on large contracts and they receive money only once from the contract (just an example). But cash flow might be the best indicator for the companies that are receiving their payments on regular basis as telecoms or utilities. 

To measure long term capabilities another indicator can be used: CFFO – Capex. This one would show net cash generating possibilities over long term and is similar to free cash flow. This ratio is one of the bests for high cash flow generating companies. Capex in this formula should include projected investments in assets that are required to continue the business successfully.