Cash flow vs profit — what's the difference?
A company can show a profit on its income statement and still go bankrupt. The cash flow statement is where you find out whether the profit is real — or whether it exists only on paper.
Why profit is not the same as cash
Imagine you sell ₹50 lakhs of goods in March but your customers pay you in June. Your income statement records ₹50 lakhs of revenue in March. Your bank account is empty. You have a profit. You have no cash.
This is how accounting works. Revenue is recognised when earned, not when cash arrives. The cash flow statement corrects for this.
A healthy company has net profit that is close to — or higher than — its operating cash flow. A persistent gap between profit and cash is a warning sign worth investigating.
The three sections you need to understand
1. Operating activities (CFO) — Cash generated by running the core business. This is the most important section.
2. Investing activities (CFI) — Cash spent buying assets or received from selling them. Almost always negative for a growing business — which is fine.
3. Financing activities (CFF) — Cash from raising money or returning it. A company consistently raising new debt to fund operations is a red flag.
Free cash flow — the number that matters most
Free cash flow (FCF) is the cash left over after a company has invested in maintaining and growing its business.
Free Cash Flow = Operating Cash Flow − Capital Expenditure (capex).
Three patterns that should worry you
1. Profit growing, cash flat or falling. The company is booking revenue it hasn't collected.
2. Operations funded by financing. If CFO is consistently negative and CFF is consistently positive, the business cannot sustain itself.
3. Capex exceeding depreciation for many years. Check whether the spend is building a dominant position or destroying capital.
A quick checklist when reading cash flows
Ask: Is operating cash flow positive and growing? Is free cash flow positive? Is capex reasonable relative to revenue? Has CFO been consistently higher than reported net profit over the last five years?
See it in practice
Check free cash flow for Tata Motors