Differences between free cash flow and operating cash flow PDF

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Summary

Finance fundamentals...

Description

What are the differences between free cash flow and operating cash flow? Answer: The differences between operating cash flow and free cashflow are summarized below: Basis of comparison

Operating cash flow (OCF)

Free cash flow (FCF)

Definition

OCF is measure of the amount of cash generated by a company's normal business operations without regard to secondary sources of revenue like interest or investments

FCF is a measure of how much cash a business generates after accounting for capital expenditures such as buildings or equipment.

Measure

It is measure of efficiency.

It is a measure of liquidity and efficiency.

Calculation

OCF=Total Revenue – Operating FCF = Operating Cash Flow – Capital Expenditures Expenses. Or, Net Income +/Changes in Assets and Liabilities + Non-Cash Expenses

Advantages

It shows the actual cash company is generating and is very difficult to manipulate. OCF is a company's financial lifeblood and it’s sudden change can drain company’s lifeblood, causing an increase in debt, share dilution, share price erosion and in more extreme cases, bankruptcy.

It allows a company to pursue opportunities that enhance shareholder value since cash can support expansion and reduce debt. Besides, closest estimate of a stock's intrinsic value after discounting and therefore a good gauge for company value.

Uses

OCF indicates whether a company is able to generate sufficient positive cash flow to maintain and grow its operations

FCF represents the cash that a company is able to generate after spending the money required to maintain or expand its asset base.

Sources

Mainly income statement

Income statement and balance sheet

Output

It provides picture of cash after deducting expenses.

It provides clear picture of available cash.

Users

External users like customers, suppliers use this data

Internal users like owners and stockholders use this data....