What is an 'Operating Cash Flow Margin'

Operating cash flow margin is a cash flow ratio which measures cash from operating activities as a percentage of sales revenue in a given period. Like operating margin, it is a trusted metric of a company’s profitability and efficiency, and its earnings quality.

'Operating Cash Flow Margin'

Operating cash flow margin measures how efficiently a company converts sales into cash. It is a good indicator of earnings quality, because it only includes transactions that involve the actual transfer of money — unlike operating margin, which includes depreciation expenses — and accounts for any increase in working capital and capital expenditure that is needed to maintain production.

Because cash flow is driven by revenues, overhead and operating efficiency, cash flow trends can be very telling, especially when comparing performance to competitors in the same industry. Has operating cash flow turned negative because the company is investing in its operations to make them even more profitable? Or does the company need an injection of outside capital to buy time to continue operating in a desperate attempt to turn around the business?

Just as companies can improve operating cash flow margin, by using working capital more efficiently, they can also temporarily flatter operating cash flow margin by delaying the payment of accounts payable, chasing customers for payment or running down inventory. But if a company’s operating cash flow margin is increasing from year to year, it indicates its free cash flow is improving, as is its ability to expand its asset base and create long-term value for shareholders.

Free cash flow margin is another cash margin measure, which also takes into account capital expenditure. In capital intensive industries, with a high ratio of fixed to variable costs, a small increase in sales can lead to a large increase in operating cash flows, thanks to operational leverage.

Operating Cash Flow Margin Calculation

Operating Cash Flow = Net Income + Non-cash Expenses (Depreciation and Amortization) + Changes in Working Capital

Assuming company X recorded the following information for last year's business activities:

Sales = $5,000,000

Depreciation = $100,000

Amortization = $125,000

Other Non-cash Expenses = $45,000

Working Capital = $1,000,000

Net Income = $2,000,000

And recorded the following information for this year's business activities:

Sales = $5,300,000

Depreciation = $110,000

Amortization = $130,000

Other Non-cash Expenses = $55,000

Working Capital = $1,300,000

Net Income = $2,100,000

We calculate the cash flow from operating activities for the current year. In this example, that would be:

Cash Flow From Operating Activities = $2,100,00 + ($110,000 + $130,000 + $55,000) + ($1,300,000 - $1,000,000) = $2,695,000

To arrive at the operating cash flow margin, this number is divided by sales:

Operating Cash Flow Margin = $2,695,000 / $5,300,000 = 50.8%

  1. Cash Flow

    Cash flow is the net amount of cash and cash-equivalents being ...
  2. Free Cash Flow Yield

    Free cash flow yield is a financial ratio that standardizes the ...
  3. Price to Free Cash Flow

    Price to free cash flow is an equity valuation metric used to ...
  4. Cash Flow Statement

    A cash flow statement is a financial statement that provides ...
  5. Cash Flow From Investing Activities

    Cash flow from investing activities reports the total change ...
  6. Sales To Cash Flow Ratio

    The sales to cash flow ratio shows how efficiently a business ...
Related Articles
  1. Investing

    Fundamental Case Study: Is Amazon's Cash Flow Actually Solid? (AMZN)

    Review Amazon's cash flow situation, including its free cash flow yield, operating cash flow from organic growth and cash flow from debt financing.
  2. Investing

    Evaluating A Statement Of Cash Flows

    The metrics for the Statement of Cash Flows is best viewed over time.
  3. Investing

    Cash Flow Indicator Ratios

    Learn about the operating cash flow to sales ratio, free cash flow to operating cash flow ratio and free cash flow coverage ratio.
  4. Investing

    Corporate Cash Flow: Understanding the Essentials

    Tune out the accounting noise and see whether a company is generating the stuff it needs to sustain itself. Learn how to read the cash flow statement.
  5. Investing

    Operating Cash Flow: Better Than Net Income?

    Differences between accrual accounting and cash flows show why net income is easier to manipulate.
  6. Investing

    Cash flow statements: Reviewing cash flow from operations

    Discover why cash flow from operating activities is significant to businesses, and learn the direct and indirect methods for calculating it.
  7. Investing

    Cash Flow From Investing

    Cash flow analysis is a critical process for both companies and investors. Find out what you need to know about it.
  8. Tech

    Cash Flow Is King: How to Keep it Running

    Why is cash flow so important, and what steps can a business take to improve it?
  9. Investing

    Cash Flow on Steroids: Why Companies Cheat

    Pressure to be the best can sometimes push corporations to cheat. Learn how they do it and how to spot it.
  1. 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 >>
  2. Are taxes calculated in operating cash flow?

    Learn how taxes are involved with the calculations for a firm's operating cash flow, and the overall significance of operational ... Read Answer >>
  3. 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 >>
  4. What are some examples of cash flow from operating activities?

    Learn about cash flow statement and cash flows from operating activities. Understand how these examples differentiate investing, ... Read Answer >>
  5. What factors decrease cash flow from operating activities?

    Understand the types of factors that reduce cash flow from operation activities. Discover how declining net income and efficiency ... Read Answer >>
  6. What is the difference between cash flow and revenue?

    Understand the difference between cash flow and revenue as they relate to corporate accounting and the financial evaluation ... Read Answer >>
Hot Definitions
  1. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  2. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  3. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
  4. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
  5. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  6. Cost of Debt

    Cost of debt is the effective rate that a company pays on its current debt as part of its capital structure.
Trading Center