The determination of cash generated from a company’s normal business activities, excluding financing and investing activities, is a crucial metric for evaluating its financial health. This figure often involves adjustments to net income by adding back non-cash expenses such as depreciation and amortization, and subtracting gains or adding losses from the sale of assets. For example, a company with a net income of $1 million, depreciation expenses of $200,000, and a gain on the sale of equipment of $50,000 would arrive at a cash flow from operations figure of $1.15 million.
This measurement provides a clearer picture of a company’s ability to generate cash to meet its obligations, reinvest in its business, and pay dividends to shareholders. It is less susceptible to manipulation than net income because it primarily focuses on actual cash inflows and outflows. Historically, analysts have used it to assess the sustainability of a company’s earnings and its ability to fund future growth. A healthy number indicates a company’s operational efficiency and its ability to weather economic downturns.
