Non-Operating Cash Flow: What it is, How it Works

What Is Non-Operating Cash Flow?

Non-operating cash flow is a key metric in fundamental analysis that is comprised of cash inflows (that a company takes in) and cash outflows (that a company pays out), which are not related to a company's operating activities. Instead, these sources and uses of cash are associated with a company's investing or financing activities. Non-operating cash flow shows up in a company's cash flow statement.

Non-operating cash flow is important because it can help analysts, investors, and companies themselves to measure how effectively a firm manages its free cash flow (FCF), how successful it is in investing its revenue or earnings, or to determine other essential indicators, such as a company's cost of capital.

Understanding Non-Operating Cash Flow

Non-operating cash flow is comprised of the cash a company takes in and pays out that comes from sources other than its day-to-day operations. Examples of non-operating cash flow can include taking out a loan, issuing new stock, and a self-tender defense, among many others. Items listed under non-operating cash flow are usually non-recurring.

Non-operating cash flow appears on a company's cash flow statement and is usually broken into two sections: cash flow from investing and cash flow from financing.

Cash Flow From Investing

This section usually contains a company's capital expenditures (CapEx), increases and decreases in investments, cash paid for acquisitions, and cash proceeds from the sale of assets.

Cash Flow From Financing

This section usually contains proceeds from and payments made on short-term borrowing and long-term debt; and proceeds from equity issuance, repurchase of common stock, or dividend payments.

Non-Operating Cash Flow in Action

Non-operating cash flow can demonstrate how a company uses its FCF—essentially, operating cash flow less CapEx—or how it finances its investing activities if it does not have any (or sufficient) free cash flow.

For example, suppose a company has generated operating cash flow of $6 billion in its fiscal year and has made capital expenditures of $1 billion. It is left with substantial FCF of $5 billion. The company can then choose to use the $5 billion to make an acquisition (cash outflow). This would appear in the cash-flow-from-investing section. The company also could issue $2 billion of common stock (cash inflow) and pay $2 billion in dividends (cash outflow). Both of these would appear in the cash-flow-from-financing section.

Suppose, though, that the company's FCF is only $2 billion, and the company was already committed to acquiring another company for $1 billion (cash outflow). This would appear in the cash-flow-from-investing section. If the company also committed to paying $2 billion in dividends (cash outflow), it could borrow an additional $1 billion in long-term debt (cash inflow). Both of these would show up in the cash-flow-from-financing section.