Operating Cash Flow vs. Free Cash Flow (2024)

FAQs

Operating Cash Flow vs. Free Cash Flow? ›

Key Takeaways. Operating cash flow measures cash generated by a company's business operations. Free cash flow is the cash that a company generates from its business operations after subtracting capital expenditures.

Operating Cash Flow (OCF) is a measure of the amount of cash generated by a company's normal business operations. Cash flow is the net cash and cash equivalents that move in and out of a company's financial statement.

Operating cash flow focuses solely on the profits a company's operations generate, while free cash flow also includes capital expenditures and debt.

Operating cash flow margin uses operating cash flow and not operating income. Free cash flow margin is another cash margin measure, where it also adds in capital expenditures.

Operating profit includes depreciation and amortization, but excludes interest and taxes. Cash flow from operations does the opposite: it excludes depreciation and amortization because they are non-cash expenses, and it includes interest and taxes because they are cash expenses.

Operating cash flow measures cash generated by a company's business operations. Free cash flow is the cash that a company generates from its business operations after subtracting capital expenditures.

Operating cash flow—also referred to as cash flow from operating activities—is the first section presented on the cash flow statement.

EBITDA sometimes serves as a better measure for the purposes of comparing the performance of different companies. Free cash flow is unencumbered and may better represent a company's real valuation.

Free cash flow, or FCF, is the money that is left over after a business pays its operating expenses (OpEx), such as mortgage or rent, payroll, property taxes and inventory costs — and capital expenditures (CapEx). Examples of CapEx are long-term investments such as equipment, technology and real estate.

What is a good operating cash flow percentage? ›

A good operating cash flow margin is typically above 50%. If a company has an operating cash flow margin of below 50%, this suggests that the company is not efficiently making sales into cash, and instead, may have high expenses.

Knowing a company's free cash flow enables management to decide on future ventures that would improve shareholder value. Additionally, having positive free cash flow indicates that a company is capable of paying its debts. Conversely, negative free cash flow suggests a company may need to raise money.

Unlike EBITDA, cash from operations includes changes in net working capital items like accounts receivable, accounts payable, and inventory. Operating cash flow does not include capital expenditures (the investment required to maintain capital assets).

When there is no cash left over after meeting operating, capital, and adjusting for non-cash expenses, a company has negative free cash flow. This means that the company has no excess cash on hand in a given period, which could be a sign of poor financial health.

Free cash flow is defined as cash from operations minus capital expenditures. Free cash flow after dividends is defined as cash from operations minus capital expenditures and dividends. Free cash flow dividend payout ratio is defined as the percentage of dividends paid to free cash flow.

Unlevered free cash flow (UFCF) is a company's cash flow before interest payments are taken into account. UFCF can be reported in a company's financial statements or calculated using financial statements by analysts.

Understanding the Difference between NOI and Cash Flow

NOI, or Net Operating Income, is about the money a property makes before paying loans. It looks at rental income minus operating costs like maintenance and fees. Cash flow is the difference between all the money coming in and going out, including loan payments.

Net Cash Flow vs. Operating Cash Flow. OCF helps businesses understand the amount of cash that their main business activities generate, but a different data point, net cash flow (NCF), is used when finance professionals want a more comprehensive view of a company's activity.

In financial accounting, operating cash flow (OCF), cash flow provided by operations, cash flow from operating activities (CFO) or free cash flow from operations (FCFO), refers to the amount of cash a company generates from the revenues it brings in, excluding costs associated with long-term investment on capital items ...

Net income is the profit a company has earned for a period, while cash flow from operating activities measures, in part, the cash going in and out during a company's day-to-day operations.