Operating cash flow is a technical calculation used to determine the health of a company or investment. Its significance is that it deals only in cash, not in the value of capital or debt. A taxable loss would refer only to a negative cash balance, but this need not imply that the company is failing. It only implies that the company is not dealing primarily in cash, but rather is dealing in capital and capital-intensive production.
1. Subtract all operating expenses from the gross cash income of the business. This is a catch-all category that takes into account almost all of those variables that remove cash from the company. Since this is before taxes, tax percentages are not included. The gross income figure is easy to find, since it refers only to the total amounts of cash a company earns in a quarter or a year. The result is the net operating income, expressed always in cash dollar amounts.
2. Subtract all depreciation from the net income figure. This is significant for companies that are heavily capital intensive. Depreciation of expensive and high-maintenance machinery can be very high, and is most often the way that a company of this type can receive a “taxable loss.” The “loss” is in the value of capital, especially high technology systems that depreciate and become obsolete rapidly. In addition, sensitive and high-maintenance items such as communications systems, for example, also lose value both through the speed of the industry and the heaviness of its use. Even if the cash flow is positive and growing, the rapid depreciation of technology might make it appear to be losing value over time. The depreciation of capital and the rapid movement of high-technology industries might make it appear that the company is doing poorly. Yet, from a cash point of view, the firm is doing well. This is a “taxable loss.”
3. Deduct all amortization payments spread out over the course of a fiscal year. Amortization in capital-intensive industries is significant because it refers almost always to intangible assets. These include ideas and intellectual properties that are very important in high-technology industries. Here, the value of the idea or property is subtracted from the normal lifetime of such a concept. In computerized industries like telecommunications, this can become a very high figure because of the speed that ideas move in this changing industry. Intellectual property can earn much in a brief time, yet also lose its value quickly. Normally, these are estimates spread out evenly through the course of a year.
4. Deduct any interest paid on outstanding loans. Highly sensitive capital industries are leveraging their equipment, if they own them at all. The deductions for the actual principle of the loans and other expenses has been dealt with earlier, so at this level, the interest alone is deducted. What is left is the cash profit or loss of the company, and is an estimate of the cash generation of the firm. A taxable loss is one where cash income remains high, but the firm's capital depreciates and amortizes rapidly. The company can appear to be losing value yet might be generating an amount of cash income that satisfies investors.
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