Operating Cash Flow Vs. Net Income, EBIT, and EBITDA
Interest is an operating flow. Since it adjusts for liabilities, receivables, and depreciation, operating cash flow is a more accurate measure of how much cash a company has generated (or used) than traditional measures of profitability such as net income or EBIT. For example, a company with numerous fixed assets on its books (e.g. factories, machinery, etc.) would likely have decreased net income due to depreciation; however, as depreciation is a non-cash expense the operating cash flow would provide a more accurate picture of the company's current cash holdings than the artificially low net income.
Earnings before interest, taxes, depreciation and amortization (EBITDA) is a non-GAAP metric that can be used to evaluate a company's profitability based on net working capital. The difference between EBITDA and OCF would then reflect how the entity finances its net working capital in the short term. OCF is not a measure of free cash flow and the effect of investment activities would need to be considered to arrive at the free cash flow of the entity.
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Famous quotes containing the words operating, cash, flow and/or net:
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—Thomas Jefferson (1743–1826)
“Lora May: Did you ever stop to think, Porter, that in over three years there’s one word we’ve never said to each other, even in fun.
Porter: To you, I’m a cash register. You can’t love a cash register.
Lora May: And I’m part of your inventory. You can’t love that either.”
—Joseph L. Mankiewicz (1909–1993)
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—John Ruskin (1819–1900)
“it was you untying the snarls and knots,
the webs, all bloody and gluey;
you with your twelve tongues and twelve wings
beating, wresting, beating, beating
your way out of childhood,
that airless net that fastened you down.”
—Anne Sexton (1928–1974)