What is Operating Cash Flow Margin?
How Does Operating Cash Flow Margin Work?
Operating cash flow margin is generally calculated using the following formula:
The operating cash flow margin is not the same as net income margin, which includes transactions that did not involve actual transfers of money (depreciation is common example of a noncash expense that is included in net income calculations but not in operating cash flow). The operating cash flow margin is also not the same as EBITDA or free cash flow.
Because working capital is a component of operating cash flow, investors should be aware that companies can influence the operating cash flow margin by lengthening the time they take to pay the bills (thus preserving their cash), shortening the time it takes to collect what’s owed to them (thus accelerating the receipt of cash), and putting off buying inventory (again thus preserving cash).
Why Does Operating Cash Flow Margin Matter?
No matter how one measures it, cash flow is what helps companies expand, develop new products, buy back stock, pay dividends, or reduce debt. This is why some people value cash flow -- and operating cash flow margin in particular -- more than just about any other financial measure out there, including earnings per share. Thus, revenues, overhead, and efficiency are big drivers of cash flow, and the trends in operating cash flow margins are very telling.
Without positive cash flow, a company may have to borrow money, raise additional equity, or simply not stay in business. It is important to note, however, that having negative operating cash flow margins for a time is not always a bad thing. If a company is building a second manufacturing plant, for example, this could pay off in the end if the plant generates more cash.
Personalized Financial Plans for an Uncertain Market
In today’s uncertain market, investors are looking for answers to help them grow and protect their savings. So we partnered with Vanguard Advisers -- one of the most trusted names in finance -- to offer you a financial plan built to withstand a variety of market and economic conditions. A Vanguard advisor will craft your customized plan and then manage your savings, giving you more confidence to help you meet your goals. Click here to get started.
Read This Next
As of July 1, there are 396 funds trading for less than the per-share value of their portfolio assets....Read More →