The Cash Flow from Operations is critical as it tells you the actual cash flows that are generated from your core operations. For example, what is the cash flow generated from the steel business for a steel company? For a cement company, it will be the cash flows generated from the cement business. Any extraordinary charges or investment income will not be included in the same. There are two important aspects of this component. Firstly, since it excludes the impact of extraordinary and non-core items, it gives a clear view of the performance of the core business.

Secondly, as it ignores non-cash charges like depreciation, it measures actual cash generated rather than the income statement number, which is more of accounting standards compliance. A good business wants to see its cash flows from operations grow steadily so that its future expansion and inorganic growth plans can be financed through its core operating cash flows. Ideally, this cash flow from operations should be looked at as a percentage of sales and also as a trend over a period of time.