When examining a company's cash flow from operating activities on its cash flow statement, an investor is able to understand the cash-generating activities and abilities of the company's core activities. A company's cash flow from operating activities can be calculated by the following equation:

Cash flow from operating activities = (net income) + (noncash expenses) + (changes in working capital)

Net Income

Net income is a good indicator of the profitability of a company. If a company has a high net income, it has a large amount of revenue or very efficient operations, or both.

Noncash Expenses

Noncash expenses are normally depreciation and amortization and are added back to a company's cash flow to show a more accurate depiction of its sources and uses of cash in its operating activities. When it comes to operating cash flow, a company should not be judged based on its monthly depreciation or amortization expenses. This is because depreciation and amortization are associated with long-term assets accounted for in the investing portion of a company's cash flow statement.

Changes in Working Capital

Changes in working capital show an investor how efficiently a company is using its capital and current assets. A negative change in working capital is not inherently good or bad but signals to an investor that a company could be investing in current assets. In the same vein, a positive change in working capital is not good or bad either but signals to an investor that a company's short-term assets are generating cash.

Cash Flow From Operating Activities

In its entirety, a company's cash flow from operating activities shows an investor how well the company is able to generate cash. A company with a high operating cash flow usually has high revenues, low overhead and efficient operations. A negative operating cash flow, however, is not a bad thing in moderation, because a company could be investing in its short-term assets.

  1. What is the difference between net income and cash flow from operating activities?

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  2. Cash flow from operating activities: Some examples

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  3. How is cash flow from operating activities calculated?

    Discover why cash flow from operating activities is significant to businesses, and learn the direct and indirect methods ... Read Answer >>
  4. Free & operating cash flows: What's the Difference?

    Learn the difference between free cash flow and operating cash flow. Explore how analysts use earnings and cash flow to evaluate ... Read Answer >>
  5. What is the difference between Operating Cash Flow and Net Operating Income (NOI)?

    Learn what operating cash flow and net operating income are, how the two metrics are calculated and the main difference between ... Read Answer >>
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