What Is the Operating Cash Flow Margin?

Operating cash flow margin is a cash flow ratio that measures cash from operating activities as a percentage🎉 of total sal𒊎es revenue in a given period.

Like operating margin, it is✃ a trust✃ed metric of a company’s profitability and efficiency and its earnings quality.

Understanding the Operating Cash Flow Margin

Operating cash flow margin measures how efficiently a company converts sales into cash. It is a good indicator of 澳洲幸运5开奖号码历史查询:earnings quality because it only includes transactions that involve♑ the actual transfer of money.

Because 澳洲幸运5开奖号码历史查询:cash flow is driven by revenues, overhead, and operating efficiency, it 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 it even more profitable? Or does the company need an injec🌠tion 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 澳洲幸运5开奖号码历史查询: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 澳洲幸运5开奖号码历史查询:free cash flow (FCF▨) is improving, as is its ability to expand its asset base and create long-term value for shareholders.

Another comparison metric is the 澳洲幸运5开奖号码历史查询:Berry ratio, which comparജes a company's operating expense and gross profit. It helps to remove static from the results of comparing companies operating in different states and paying different state tax rates.

ꦍOperating Cash Flow Margin vs. Operating Margin 

The operating cash flow margin is unlike the 澳洲幸运5开奖号码历史查询:operating margin. The o♊perating margin includes depreciation and amortization expenses. However, operating cash flo𝕴w margin adds back non-cash expenses, such as depreciation. 

Operating margin is calculated as operating income divided by revenue. This is similar to operating cash flow margin except it uses operating 🐠income. Operating cash flow m♏argin uses operating cash flow and not operating income.

Free cash flow margin is another cash margin measure, where it also adds in capital expenditures. 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 澳洲幸运5开奖号码历史查询:operational leverage.

Operating Cash Flow Margin Example 

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

Ass൩uming company ABC recorded the fo🔥llowing information for 2018 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 ꦆthe following information for 2019’s busine💦ss 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 activi🤪ties for 2019 as:

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

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

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

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