Cash flow from operations *please help*

Why doesn’t cash flow from operations include net income? Surely the net income is part of the the cash from operations?

What I’m trying to understand is why free cash flow doesn’t nclude net income :thinking:

We don’t include net income directly because net income does not represent cash-flow.

For example we have Net Income of 30,000 USD. This does not mean our cash increased by 30,000.

You need to factor items such as depreciation expenses and increases in receivables (and many more), which are “non-cash” items. (For example depreciation represents an expense, but we don’t have cash-outflow when incurring such expense). Hence if a firm has a lot of depreciations, its net income will be lower, but its cash-flow from operations might be potentially higher than its net income.

If you check how we arrive to cash flow from operations it starts with net income at the top, and then subsequently we make adjustments to it.

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I’m really confused I read that:

operating cash flow = net income + non-cash items + Changes in working capital.

Free cash flow = operating cash flow - CAPEX

So surely free cash flow includes net income?


Yes correct, you use net income to obtain operating cash flow.

You can also calculate free cash flow from net income.

Think it this way: free cash flow includes Net Income, but this amount is adjusted to reflect actual Cash transactions.

Basically you could put it as:

Free cash flow= net income + non-cash items + Changes in working capital - capex

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Thank you Maocn, I know I sound a dummy dumb dumb but it’s confusing when you look online, people all use different terminologies and trying to analyse T212 statements can spin you out as a newbie as they don’t provide the full picture.

Don’t worry its normal, I struggle to understand many things to and generally use Investopedia to gen an idea.

There are generally many way in obtaining a certain number and ppl might use different versions. When analyzing financial check also the numbers on Yahoo Finance as they provide some additional insight too. And usually the annual report by the company are the best place to have a full breakdown of the numbers. You’ll definitely get more used the more you read.

Yeah I’m getting there. Just wanted to know for sure so I can calculate FCF to sales, I think this is one of the more important metrics. Combine this with current ratio and debt to equity to find strong resistant companies.

If you want the easy route just go on yahoo finance! In their financials sections of a company it has the “cash flow statement” and they provide FCF directly!

Thanks I like to calculate first of all so I understand it but I’ll have a look. Sometimes the data is missing for my small caps tho.

This new IFRS 16 leases is another headache. I don’t really fully understand it. Apart from it increases liabilities and assets basically providing you with a more accurate long term picture.

Complete headache.