Operating Cash Flow

Operating Cash Flow measures the cash generated by the core business operations and indicates the level of Operating Efficiency.

Operating Cash Flow (OCF) is a key line in the annual Profit and Loss, measures, the cash generated by a Company via its normal business operations. OCF is calculated before considering Interest Expense and changes in Investments. The calculation for OCF does take into consideration changes in Working Capital. Changes in Working Capital can be done in a quick and simple way by the Formula.

WC Changes = Current Assets – Current Liabilities

A more accurate formula is.

WC Changes = Accounts Receivables + Inventory – Accounts Payable

Thus, the core factors in the Cash Conversion Cycle.

Current Shareholders must be aware of this. This could be by either a New Issue of Shares, diluting current Shareholders or via an increase in Leverage, Debt Financing. If there is an increase in Expansion CAPEX, this is likely to require external funding. Further, Dividends are paid out of Net Income, but the Dividend should be covered by OCF, not external Financing or changes in Investments. The level of Dividend Coverage can be calculated by the following formular.

Dividend Coverage = OCF per Share / Dividend per Share.