Analysts look at operating cash flow when considering the financial health of a business entity. Insufficient cash flow may indicate that a business is unable to financially sustain normal operations, and it may be unable to grow. A high operating cash flow suggests a financially strong business that is able to support itself and perhaps generate a profit for the owners or investors. The operating cash flow is calculated by subtracting financial obligations, adding depreciation, and adding or subtracting working capital. The result provides a more accurate picture of financial health that accounts for the difference between mere revenue and genuine profit. While a business may be earning significant revenue, total expenses and obligations may eliminate the possibility of making a profit, and may not leave sufficient funds for basic operating costs.

Some expenses are left out of the operating cash flow calculation; these include expenses incurred by investing activities and financial transactions. These are part of normal business operations, but are not very informative for cash flow purposes. The distribution of dividends, common stock and the issuance of securities is also separated from operating cash flow, for the purposes of determining financial health. Operating cash flow is interested only in the costs of doing business as they relate to production, depreciation and obligations.

After obtaining a business's revenue and liabilities, a Cash Flow Ratio may be determined by dividing the total cash flow by total liabilities. This ratio is used to show ability to pay liabilities. A ratio greater than 1 indicates a company capable of paying short-term debt. Analysts can then use this number to determine if the company is sufficiently stable financially.

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  2. What does the operating cash flow ratio measure?

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  1. Free Cash Flow Yield

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  2. Operating Cash Flow - OCF

    Operating Cash Flow (or OCF) is a measure of the amount of cash ...
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    A valuation metric that compares a company's market price to ...
  5. Sales To Cash Flow Ratio

    A comparison of a company's sales to its cash flow. The sales ...
  6. Free Cash Flow Per Share

    On a per share basis, free cash flow per share is cash available ...
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