A company's profit and loss account tells you whether it made a profit. The cash flow statement tells you whether it collected the money. The two are not the same. A company can report a profit on a sale today and receive the cash in six months, or never. It can spend ₹1,000 crore on a new plant this year and show only a small part of it as an expense. Businesses run out of cash, not profit, which is why experienced investors often read the cash flow statement first.
Indian listed companies publish a full cash flow statement with their annual results and, under current rules, a half-yearly one with their September results; check the current disclosure rules for the exact requirement.
Why profit and cash differ
- Credit sales: a sale is booked as revenue when made, but the customer may pay later. Unpaid bills sit on the balance sheet as receivables (debtors).
- Inventory: cash spent on raw materials and unsold goods is not an expense until the goods are sold.
- Depreciation: a machine's cost is spread over many years as an expense, though the cash left when it was bought.
- Capital spending: building a factory uses a lot of cash but barely touches this year's profit.
The money tied up in receivables and inventory, minus what the company itself owes suppliers (payables), is called working capital. When working capital grows, cash is being absorbed even if profit looks fine.
The three sections
| Section | What it covers | Usually healthy when |
|---|---|---|
| Operating cash flow (CFO) | Cash from the core business: collections from customers minus payments to suppliers, staff and tax | Positive and close to net profit over time |
| Investing cash flow (CFI) | Buying or selling plants, equipment, businesses and investments | Negative for a growing company (it is investing) |
| Financing cash flow (CFF) | Borrowing and repaying loans, issuing shares, paying dividends and interest | Negative for a mature company repaying debt and paying dividends |
The three add up to the change in the company's cash balance over the year.
Free cash flow
Free cash flow (FCF) = operating cash flow − capital expenditure
Capital expenditure (capex) is cash spent on long-lived assets: plants, machines, offices, technology. Free cash flow is what is left for the owners and lenders: to repay debt, pay dividends, buy back shares or build up cash. A company that earns profits but never produces free cash flow has to keep borrowing or issuing shares to grow.
A worked example
Two companies each report net profit of ₹500 crore for the year (₹ crore):
| Item | Company X | Company Y |
|---|---|---|
| Net profit | 500 | 500 |
| Add back depreciation | +150 | +150 |
| Increase in receivables | −50 | −450 |
| Increase in inventory | −30 | −200 |
| Operating cash flow | 570 | 0 |
| Capital expenditure | −200 | −200 |
| Free cash flow | 370 | −200 |
Company X turned its profit into cash and had ₹370 crore left after investing. Company Y booked the same profit, but its customers have not paid and its warehouses are filling up; it generated no operating cash and had to find ₹200 crore elsewhere, probably by borrowing. One year like this can have innocent reasons (a big order shipped in March, a planned stock build-up). Several years in a row deserves serious questions.
A simple check is the ratio of operating cash flow to net profit, added up over five years. Close to 1 or higher is reassuring; well below 1 means profit is not becoming cash.
Live example: cash and the market's verdict
Cash flow figures come out at most twice a year, while the market prices the business every day. Here is a live box for Tata Consultancy Services, a company known for turning most of its profit into cash:
Use the trend fields, the 50-day and 200-day averages, to see how the market is treating the stock now; then check whether the latest cash flow supports or contradicts that view. The technicals pages show the same for any NSE stock, and the screener combines price with fundamentals.
Patterns across the three sections
Reading the signs (positive or negative) of the three sections together gives a quick picture of where a company is in its life:
| Operating | Investing | Financing | Typical story |
|---|---|---|---|
| + | − | − | Mature and healthy: earns cash, reinvests some, repays debt or pays dividends |
| + | − | + | Expanding: earns cash but borrows or raises shares to invest even more |
| − | − | + | Young or struggling: needs outside money for both operations and investment |
| − | + | − | Under pressure: selling assets to repay lenders |
These are rough patterns, not rules. A company can sit in the "expanding" row for years quite safely if the new assets start earning. The point is to know which story the numbers are telling and then check whether the rest of the accounts agree.
It is also worth working out the cash conversion cycle: the number of days money is tied up in inventory plus the days customers take to pay, minus the days the company takes to pay its suppliers. A cycle that keeps lengthening means each rupee of sales needs more cash than before.
Warning signs
- Profit rising, operating cash flow flat or falling for several years.
- Receivables growing much faster than sales: customers are taking longer to pay, or sales are being booked aggressively.
- Constant borrowing to pay dividends: financing inflows paying for financing outflows.
- Large "other" or related-party items in investing cash flow, such as loans to group companies.
- Capex always far above operating cash with no sign of the new assets earning.
Sector differences
Banks and finance companies have cash flow statements that are hard to read in this way, because lending money out is their operating activity, so operating cash flow swings with loan growth. Infrastructure and real estate companies often have long gaps between spending and collecting. Software and consumer brand companies usually convert profit to cash easily. As with every measure, compare within a sector and over several years.
A good beginner routine is to line up five years of net profit, operating cash flow and capital expenditure side by side. Add each column up. If total operating cash is close to total profit and comfortably above total capex, the business funds itself. If operating cash is far below profit, or capex has swallowed every rupee, find out why before trusting the profit figure. The notes to the accounts and the annual report usually explain large swings in receivables, inventory or capex, and reading them is what turns a warning sign into either a real concern or a harmless timing difference.
Linking cash flow with debt and with quarterly results gives a much more complete picture than profit alone. This guide is for education only.