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Operating profit comes from the income statement and essentially reduces total revenues by the cost of generating those revenues. I think that strictly speaking operating profit takes into account depreciation and amortization but not interest and taxes (since there is an additional term, net operating profit after taxes, the NOPAT of Quest for Value fame).

Cash flow from operations (I'm assuming that you mean net cash flows from operations) does include taxes paid and interest and does not include depreciation and amortization.

Therefore, I would think that a company's operating profits could be negative and cash flows positive if the depreciation and amortization exceeded the amount of cash flow from operations.

If interest and taxes exceeded amortization and depreciation, then cash flows from operations could be negative and net operating profit positive [at least one book I have defines operating profits as EBIT and I see EBIT as the numerator in Greenblatt's equation for ROC: EBIT/(net working capital + net fixed assets].

I would guess that a highly ranked Magic Formula company would have positive cash flows and positive operating profit, although cash flow is not included in either of the two equations he uses to rank companies and thus generate the elements he then adds up for the magic number.

I actually just finished reading the Little Book today - takes about an hour - the data mining is reasonable, sustained ROC is a nice surrogate for moat and yield for value. The average IETC poster doesn't need to buy the book, just get a cappuccino at Barnes and Noble and knock the book off in the cafe this weekend.

Rog
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