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.
Read more about this topic: Operating Cash Flow
Famous quotes containing the words operating, cash, flow and/or net:
“I think there are innumerable gods. What we on earth call God is a little tribal God who has made an awful mess. Certainly forces operating through human consciousness control events.”
—William Burroughs (b. 1914)
“The Church has always been willing to swap off treasures in heaven for cash down.”
—Robert Green Ingersoll (1833–1899)
“The current of our thoughts made as sudden bends as the river, which was continually opening new prospects to the east or south, but we are aware that rivers flow most rapidly and shallowest at these points.”
—Henry David Thoreau (1817–1862)
“Even in harmonious families there is this double life: the group life, which is the one we can observe in our neighbour’s household, and, underneath, another—secret and passionate and intense—which is the real life that stamps the faces and gives character to the voices of our friends. Always in his mind each member of these social units is escaping, running away, trying to break the net which circumstances and his own affections have woven about him.”
—Willa Cather (1873–1947)