Why Companies Crushing Cash Flow Today Could Suddenly Crash Tomorrow – The 10-Year Profit Trap You Can’t Afford to Ignore!
Components:
- Earnings before extraordinary items
→ This is similar to net income from continuing operations. - Plus depreciation
→ A non-cash expense added back, just like in the indirect method of calculating operating cash flow. - Plus deferred taxes (if available)
→ These are non-cash tax expenses, often included in the reconciliation from earnings to OCF.
Interpretation:
This formula is effectively:
Operating Cash Flow ≈ Net Income + Depreciation + Deferred Taxes
It excludes:
- Changes in working capital
- Non-operating items like capital expenditures or financing flows
Which makes it:
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