Two metrics that investors look at in a company’s financial statements are its net operating income and operating cash flow. Net operating income analyzes its ability to generate income from its operations in a fiscal period, while operating cash flow measures the amount of cash by its operations in a fiscal period.
Net operating income is generally used to calculate and analyze real estate investments. It looks at the ability of its investments to generate income. It can be calculated by subtracting a company’s operating expenses from its gross operating income. The net operating income represents the productivity and cash flow of an investment. For example, suppose company XYZ owns a building that generated a gross operating income of $1 million and had operating expenses of $250,000 in the last fiscal year. The net operating income is $750,000, which shows XYZ has positive return rates and is not losing any money.
Operating cash flow, on the other hand, looks at the amount of cash flowing in and out of a company. Operating cash flow is calculated by subtracting its operating expenses from its revenues. For example, suppose company ABC had revenues of $2 million and operating expenses of $500,000 in the last fiscal year. Its operating cash flow is $1.5 million.
Depreciation expenses affect net operating income but does not affect operating cash flows. Since a company doesn’t spend money for a depreciation expense, it is not taken into account in operating cash flows. Although a company could have high operating cash flows, it can have a low net operating income due to depreciation expenses.