Cash flow from operating activity refers to the amount of money that a company has earned from its regular business activity such as selling goods/services. It excludes any money brought into the business via borrowings or sale of assets.
Cash flow from operating activity can be calculated by using the formula :
Profit before interest & taxes + depreciation & amortization expense + gains & losses from financing & investment activities + changes in working capital
Cash flow from operating activities should always be compared with the company’s net income. If the cash flow from operating activities is consistently higher than the net income, then the company’s earnings are of high quality. If that is not the case then one has to attempt to understand why the reported net income is not being converted into cash inflow by the company.