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Penny Stock Basics

Operating Cash Flow & Free Cash Flow – What’s the Difference?

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Written by Timothy Sykes
Updated 1/19/2023 7 min read

In this post, it’s my goal to explain Difference Between Operating Cash Flow And Free Cash Flow, so sit back and enjoy!

The job of every company is to make money, and there is no money like cash. For companies, it might not be physical cash, but it’s definitely actual money that can be accessed at any time as opposed to a guaranteed IOU such as accounts receivable. It is not surprising that some investors always look at cash flow.

You really can’t get away without looking at earnings, but cash flow can let you assign a quality to earnings. For those people who like to get to the rawest of information cash flow is available on the cash flow statement. Also, looking at the income statement can give you an idea of the mix of earnings. Between the two of those you can cut through the accounting and get an idea of what the company is doing.

Cash flow is great for those companies with subscriptions or digital sales that have deferred revenue, because they receive the money upfront, but might not be able to report certain amounts for months.

If it is a 2 year subscription the company has to slowly recognize the revenue for 2 years, and at the end of it the cash is long gone but you are still recognizing some revenue. All this exists because we refuse to stand by and accept that companies are not really comparable to one another on a standard scale. We need some method of comparison.

Operating Cash Flow

Operating cash flow is the money the company receives as part of its business operation. If you sell widgets, than the money the consumer gives you is cash from operations. If you sell chairs but decide to sell some office equipment as part of a downsizing, it would not be cash flow from operations.

That is a silly example. If you receive money from a credit facility or from investors getting preferred shares that is cash from financing or investing and not operations.

Operating cash flow is the purest inflow and outflow of cash in relation to actually doing business. From a company health perspective it is one of the most important measures, but it is most suitable to simpler companies without too much complexity. With more complex companies you need to look at a lot of other stuff. Cash flow is always useful despite being limited every now and then.

Consider the few times that operating cash flow would be limited. Companies with great sales, but are terrible at business. Excessive CapEx on assets that might not have good returns, and similar items. Non-operating cash outflows are not included. So an inefficient company with efficient operations would look good from operating cash flow, but it uses that incoming wealth poorly.

Always look at the balance sheet with operating cash flow, because a company with weak operations can leverage the balance sheet to explore new opportunities or expand existing business or create new efficiencies. Nothing can be looked at in a vacuum.

Free Cash Flow

This is an interesting measure of cash flow that tends to be a favorite of many. It is cash that is not earmarked for anything specific. Normal operating cash flow might bring in cash that is directed to more production, and even profits can be used for this. Free cash flow is almost like true profit, but it includes things that are not profit at all.

Free cash flow includes things like asset sales, which makes it different from operating cash flow. It also subtracts capital expenditures. That is pretty important, because CapEx is not a regular expense.

The money is not gone. It is carried on the balance sheet as an asset.

The end goal is for the company to generate a return on the asset. Free cash flow is what is left after all is said and done. It is not uncommon for an aggressively expanding company to have negative free cash. That means they are dipping into reserve cash for CapEx.

If a company is building up free cash it can mean that organic expansion is slowing down. Free cash flow will build up cash on the balance sheet, which can be used to pay debt, dividends, or make acquisitions.

There is a lot of debate about what is superior organic vs. acquisitions. That is probably something that should be discussed later. The point is that free cash flow can give you some insight into the trajectory and strategy of the company. Great earnings, but negative free cash can be a sign of a lot of expansion.

Free cash flow is like the end all goal of companies. The point is to do so well that you make so much money that even after all the checks written to expand the business you still have a lot of cash. Cash is pretty much the most important thing, and free cash is the most flexible kind of cash there is.

My Trading Challenge

If you’re reading this article, I assume you’re serious about making money. Maybe you’re interested in generating five or six figures a year so you can enjoy the laptop lifestyle for the rest of your days. Or perhaps you’re committed to generating at least $1 million in profits from the stock market.

My students come from all walks of life, and each has individual goals. Everyone is working for something, though, and I teach my students to visualize their ideal lifestyle while they’re learning from me and other successful traders.

Furthermore, the challenge offers a community of like-minded people who help each other achieve their goals. It’s not just me in the trenches. When you know there are other people striving for the same things you want, you’ll have greater motivation to work hard.

If you want to create a different life for yourself, I invite you to apply for my Trading Challenge. I’m looking for my next success story, and you might become that person if you’re willing to put in the effort and become a successful trader.

The Bottom Line

Cash flow is a great way to judge quality of the other numbers. Especially free cash flow, when you look at CapEx.

There are some companies doing so well that even after heavy expansion they have a lot of cash left over. It can be a great way to get a better understanding of companies, and head off issues.

Some companies expand aggressively in order to prevent a decline, and that can be a sign of weakness.

You can see the expansion and make a judgment on what you think will happen.

Cash flow gives you a really good picture of companies, and it remains well-known but underused.

The importance of cash means that even short-term traders can benefit from taking a look, but mid to long-term traders might find a bit more benefit.

Even short-term traders need to spot problems early for a potential trade later.

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Timothy Sykes

Tim Sykes is a penny stock trader and teacher who became a self-made millionaire by the age of 22 by trading $12,415 of bar mitzvah money. After becoming disenchanted with the hedge fund world, he established the Tim Sykes Trading Challenge to teach aspiring traders how to follow his trading strategies. He’s been featured in a variety of media outlets including CNN, Larry King, Steve Harvey, Forbes, Men’s Journal, and more. He’s also an active philanthropist and environmental activist, a co-founder of Karmagawa, and has donated millions of dollars to charity. Read More

* Results are not typical and will vary from person to person. Making money trading stocks takes time, dedication, and hard work. There are inherent risks involved with investing in the stock market, including the loss of your investment. Past performance in the market is not indicative of future results. Any investment is at your own risk. See Terms of Service here

The available research on day trading suggests that most active traders lose money. Fees and overtrading are major contributors to these losses.

A 2000 study called “Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors” evaluated 66,465 U.S. households that held stocks from 1991 to 1996. The households that traded most averaged an 11.4% annual return during a period where the overall market gained 17.9%. These lower returns were attributed to overconfidence.

A 2014 paper (revised 2019) titled “Learning Fast or Slow?” analyzed the complete transaction history of the Taiwan Stock Exchange between 1992 and 2006. It looked at the ongoing performance of day traders in this sample, and found that 97% of day traders can expect to lose money from trading, and more than 90% of all day trading volume can be traced to investors who predictably lose money. Additionally, it tied the behavior of gamblers and drivers who get more speeding tickets to overtrading, and cited studies showing that legalized gambling has an inverse effect on trading volume.

A 2019 research study (revised 2020) called “Day Trading for a Living?” observed 19,646 Brazilian futures contract traders who started day trading from 2013 to 2015, and recorded two years of their trading activity. The study authors found that 97% of traders with more than 300 days actively trading lost money, and only 1.1% earned more than the Brazilian minimum wage ($16 USD per day). They hypothesized that the greater returns shown in previous studies did not differentiate between frequent day traders and those who traded rarely, and that more frequent trading activity decreases the chance of profitability.

These studies show the wide variance of the available data on day trading profitability. One thing that seems clear from the research is that most day traders lose money .

Millionaire Media 66 W Flagler St. Ste. 900 Miami, FL 33130 United States (888) 878-3621 This is for information purposes only as Millionaire Media LLC nor Timothy Sykes is registered as a securities broker-dealer or an investment adviser. No information herein is intended as securities brokerage, investment, tax, accounting or legal advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation or sponsorship of any company, security or fund. Millionaire Media LLC and Timothy Sykes cannot and does not assess, verify or guarantee the adequacy, accuracy or completeness of any information, the suitability or profitability of any particular investment, or the potential value of any investment or informational source. The reader bears responsibility for his/her own investment research and decisions, should seek the advice of a qualified securities professional before making any investment, and investigate and fully understand any and all risks before investing. Millionaire Media LLC and Timothy Sykes in no way warrants the solvency, financial condition, or investment advisability of any of the securities mentioned in communications or websites. In addition, Millionaire Media LLC and Timothy Sykes accepts no liability whatsoever for any direct or consequential loss arising from any use of this information. This information is not intended to be used as the sole basis of any investment decision, nor should it be construed as advice designed to meet the investment needs of any particular investor. Past performance is not necessarily indicative of future returns.

Citations for Disclaimer

Barber, Brad M. and Odean, Terrance, Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors. Available at SSRN: “Day Trading for a Living?”

Barber, Brad M. and Lee, Yi-Tsung and Liu, Yu-Jane and Odean, Terrance and Zhang, Ke, Learning Fast or Slow? (May 28, 2019). Forthcoming: Review of Asset Pricing Studies, Available at SSRN: “https://ssrn.com/abstract=2535636”

Chague, Fernando and De-Losso, Rodrigo and Giovannetti, Bruno, Day Trading for a Living? (June 11, 2020). Available at SSRN: “https://ssrn.com/abstract=3423101”