Cash Flow from Operating Activities

Cash flow from operating activities  is a section of the  cash flow statement  that provides information regarding the cash-generating abilities of a company' s core activities.

Cash flow from operating activities  is generally calculated according to the following formula:

Cash Flow from Operating Activities =  Net income  + Noncash Expenses + Changes in  Working Capital

The noncash expenses are usually the  depreciation  and/or  amortization  expenses listed on the firm' sincome statement.

A statement of cash flows typically breaks out a company' s  cash  sources and uses for the period into three categories: cash flows from operations, cash flows from  investing  activities, and cash flows from financing activities. Cash flows from operations primarily measures the cash-generating abilities of the company' s core operations rather than from its ability to raise  capital  or purchase assets. 

Because working capital is a component of  cash flow  from operations, investors should be aware that companies can influence cash flow from operating activities by lengthening the time they take to pay the bills (thus preserving their cash), shortening the time it takes to collect what&rsquo s owed to them (thus accelerating the receipt of cash), and putting off buying  inventory  (again thus preserving cash). It is also important to  note  that companies also have some leeway about what items are or are not considered capital expenditures, and the investor should be aware of this when comparing the cash flow of different companies.

It is important to note that cash flow is not the same as net income, which includes transactions that did not involve actual transfers of  money  (depreciation is common example of a noncash expense that is included in net income calculations but not in cash flow calculations).

Cash  helps companies expand, develop new products, buy back  stock, pay dividends, or reducedebt. This is why some people value  cash flow  statements more than just about any other financial statement or measure out there, including  earnings  per share -- it' s also why many  analysts  look to cash flow from operations for insight into the core of a company' s cash-generating engine. 

Almost all cash flow measures are influenced heavily by the state of a company&rsquo s cash from operations, which in turn is heavily influenced by a company&rsquo s  net income. Thus, higher  revenues, lower  overhead, and more efficiency are big drivers of cash flow from operating activities. For these reasons, investors often hunt for companies that have high or improving cash flow from operations but low share prices--the disparity often means the share price  will  soon increase.

It is important to  note, however, that having negative cash flow for a time is not always a bad thing. If a company is a net spender of cash from operations for a time because it is introducing a new project, for example, this could pay off in the end if the company' s operations generate more cash. On the other hand, if the company has a negative cash flow from operations because it made a poor managerial decisions, then the long-term benefit might not be there. ( I Trust The Management Make Good Decisions )