FIN101 #13 FROM EBITDA TO OPERATING CASH FLOWS

Sep 24, 2021 FINANCE 101

Given the obsession with cash, it’s not surprising that there is a separate ­financial statement dedicated to it: the statement of cash‑flows. Many ­finance professionals consider the statement of cash‑flows a company’s most important ­financial statement. Rather than focusing on the income statement, which has the problems of noncash expenses and managerial discretion, or a balance sheet, which has the problems of historical cost accounting and conservatism, many people in fi­nance focus on the statement of cash‑flows because it looks purely at cash.

Typically, a statement of cash-flows has three parts: operating, investing, and fi­nancing sections. The fi­rst section, operating cash‑flows, provides both the next measure of cash and brings together many of the elements that we’ve already discussed.

Operating Cash Flow Equation:

Operating cash flow = Net Profit

         + Depreciation and Amortization

         – increase in Accounts Receivable

         – increase in Inventory

        + increase in Unearned Revenue        

+ increase in Account Payable

More generally, working capital—receivables, inventories, and payables—can have signi­ficant cash-flow consequences.

Operating cash flow is distinct from EBITDA in several ways. First and foremost, it considers the costs of working capital, and second, it accounts for tax and interest payments by beginning with net profi­t. And ­finally, it includes noncash expenses other than depreciation and amortization, such as share-based compensation, in its ­final calculation.

What about the rest of the cash-flow statement? Briefly, the investing section of the cash-flow statement emphasizes the ongoing investments that bypass the income statement and go straight into the balance sheet, such as capital expenditures and acquisitions. The ­financing section examines whether a company has offered debt or paid back debt or issued equity or bought back stock and reveals the cash consequences of doing so.

By thanhnambui

I am a bank employee specializing in trade finance- a field that is not directly linked to my university major in Financial Investment. However, with a passion for economics and finance, I determined to pursue a higher education degree and successfully achieved a Master in Economics of Banking and Finance from CFVG in 2019. During that study time, I encountered many difficulties in consolidating background knowledge studied at university, which made me realize the necessity of building foundation for effective learning outcomes. Therefore, my friend and I decided to create Econfin-Invest to record basic knowledge of economics, banking, finance, and investment fields. The articles I write are carefully selected and collected from a wide range of different reliable sources such as textbooks, economic and financial reports and relevant journals. Most importantly, these articles are not A to Z lectures of subjects related to the aforementioned fields, yet simply articles I consider to be accessible to all interested readers as well as being essential to apply in everyday practices. Thank you for reading and supporting!

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