What is the formula for operating cash flow (OCF)?

The formula for operating cash flow (OCF) is derived from the net income of a company and adjusted for non-cash expenses and changes in working capital. The first step in calculating OCF involves taking earnings before interest and taxes (EBIT), which reflects the company's operating performance without the effects of capital structure and tax strategies.

Adding depreciation back to EBIT is essential because depreciation is a non-cash expense; it reduces taxable income but does not entail an actual cash outflow. Therefore, to accurately represent the cash generated from operations, depreciation needs to be added back to EBIT.

Finally, subtracting taxes is a critical component of this calculation, as taxes represent a cash outflow that reduces available cash. By combining these elements, the formula provides a true reflection of cash generated from a firm's core business operations.

This results in the formula: OCF = EBIT + Depreciation - Taxes. Thus, the answer clearly aligns with this formula, leading to a better understanding of how operating cash flow is assessed in corporate finance.