After Tax Cash Flows From Operations Are Calculated As Who Else Wants To Know About Operating Cash Flow

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Who Else Wants To Know About Operating Cash Flow

Today we’re going to take a look at operating cash flow, which is the most important number in a company’s accounts. Many investors pay close attention to these numbers because they provide important clues to an investor trying to assess a company’s health and value.

What is operating cash flow?

It is simply cash that the company generates from its normal operations. For example, if you’re a retailer like Walmart, a large portion of your revenue will come from the difference between the selling price of an item and how much it costs you to sell it.

Operating Cash Flow has a lot in common with EBITDA, same Earnings before interest tax, depreciation and amortization. And usually these numbers are not very different, which is why I say they are very similar.

The difference is due to working capital. I can assume you know what working capital is. One of the problems with learning accounting is that you have to learn many things at once. Eventually you will piece them all together.

working capital

So let’s take a quick look at working capital. The difference between current assets and current liabilities is working capital. The term current simply means that it should come off the company’s books within one year. So a current asset is something that is expected to be sold or used within a year.

Now, we can see the formula. Operating cash flow equals net income plus non-cash expenses. It’s generally depreciation and amortization, mainly let’s add the power of our EBITDA. Also let’s change the working capital.

This is the basic formula for driving cash flow

Mathematically,

Working Capital = Current Assets – Current Liabilities = Net Income + Non-Cash Expenses + Change in Working Capital = Basic formula for driving cash flow.

Some applications and how it is useful for an investor.

Working capital is very useful; The main use is;

This can reveal unclear accounting. For example; A company can make huge profits but very little cash flow. This could indicate a problem, and you should be very skeptical of a source of profit without being backed up by strong cash flow.

This gives you a more realistic idea of ​​the company’s health. Consider a retailer with its own stores, if the property market rockets, the company will record huge profits. But its cash flow will not be huge. So when you go into those numbers and analyze them, you see that the core business is not nearly as profitable as the gross profit numbers. Another thing you need to be aware of

A company’s cash flow is used to grow its business. So a company that doesn’t generate much cash flow will have to get its expansion capital from somewhere else. Usually a bank.

Finally, now that you know what operating cash flow is, you can’t just rely on statement figures. There are tricks that companies have used to increase their numbers. Increasing the time it takes to pay suppliers while collecting the money you owe faster. How do you see that increasing operating numbers? Think about it. You’re bringing in money early and paying less. This is really a farce, but it gives the illusion of higher operating numbers. So hope you understand the basic idea. To know more about bookkeeping services, go here now!

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