Reading Company Fundamentals
Chapter 4 of 5
The cash flow statement
7 min read
A company can report a profit and still run out of cash. The cash flow statement tracks actual money moving in and out, and it is harder to dress up than profit.
Three sections
- Operating activities: cash generated by the core business. This is the most important line.
- Investing activities: cash spent on or received from assets, such as buying plants (capital expenditure) or selling investments.
- Financing activities: cash from borrowing, repaying loans, issuing shares or paying dividends.
Profit without cash
- A company books ₹100 crore of profit, but customers owe it ₹120 crore more than last year.
- Because that money has not been collected, operating cash flow can be negative even though profit looks healthy.
- Over time, profit that never turns into cash is a warning.
Free cash flow
Free cash flow is operating cash flow minus the capital spending needed to maintain and grow the business. It is the cash left for shareholders and debt repayment, and consistently positive free cash flow is a sign of a self-funding business.
- Compare operating cash flow with profit over several years; the two should broadly track each other.
- Check whether dividends and growth are funded by operations or by new borrowing.
Key takeaways
- Profit is an accounting number; cash is real.
- Operating cash flow should follow profit over time.
- Free cash flow shows what a business can really return to owners.
This content is for education only and is not investment or tax advice. Mutual fund investments are subject to market risks; read all scheme-related documents carefully.