How to Calculate Cash Profit
Cash profit is a measure of a company’s financial health, calculated as the cash inflows from operating activities minus the cash outflows from operating activities. This measure is also known as the operating cash flow.
Operating cash flow or cash profit provides an indication of the amount of cash generated by the company’s regular business operations. Unlike net income, cash profit ignores non-cash expenses like depreciation and amortization, which makes it a good measure of the company’s financial performance.
The formula to calculate Cash Profit (Operating Cash Flow) is:
Cash Profit = Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) – Changes in Working Capital
Where:
- EBITDA is a measure of a company’s operating performance. It’s basically Net Income with Interest, Taxes, Depreciation, and Amortization added back to it.
- Changes in Working Capital is the difference between current assets and current liabilities.
It’s important to note that the calculation of EBITDA may vary slightly depending on the company and the analyst. Some analysts may prefer to start with Operating Income (EBIT) and add back Depreciation and Amortization.
Also, the term “Cash Profit” can have different interpretations, so it’s crucial to clarify what exactly is being referred to when this term is used.
Example of How to Calculate Cash Profit
Let’s consider a hypothetical company, XYZ Corp., with the following financial figures:
- Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA): $500,000
- Current Assets at the start of the year: $200,000
- Current Assets at the end of the year: $250,000
- Current Liabilities at the start of the year: $150,000
- Current Liabilities at the end of the year: $180,000
To calculate the Cash Profit or Operating Cash Flow:
First, you need to calculate the Changes in Working Capital:
Changes in Working Capital = (Current Assets_end – Current Assets_start) – (Current Liabilities_end – Current Liabilities_start)
= ($250,000 – $200,000) – ($180,000 – $150,000)
= $50,000 – $30,000
= $20,000
Then, calculate the Cash Profit using the formula:
Cash Profit = EBITDA – Changes in Working Capital
= $500,000 – $20,000
= $480,000
So, the cash profit (Operating Cash Flow) for XYZ Corp. for this period is $480,000. This figure represents the cash generated from the company’s regular business operations, providing an indication of the company’s financial health and liquidity.
