Cash Flow Statement | Finzony United States

Academy Fundamental Analysis Reading Financial StatementsCash Flow Statement

Lesson 3 of 3

Cash Flow Statement

Revenue is vanity, profit is sanity — but cash is reality. The statement that can't be faked.

Why Cash Flow Matters More Than Profit

Imagine a furniture shop that sold ₹50 lakh worth of sofas in March — but all buyers said "I'll pay in 60 days." According to the P&L, the shop made ₹50 lakh in revenue and looks profitable. But there's zero cash in the bank right now. Staff salaries are due next week. Rent is due tomorrow. The shop is profitable on paper — but cash-strapped in reality.

This is why the Cash Flow Statement exists. While the P&L can be manipulated through accounting choices (when to recognize revenue, how fast to depreciate assets), cash is much harder to fake. Either money came in, or it didn't. Either it went out, or it didn't.

The Cash Flow Statement tracks the actual movement of cash in and out of the business over a period — and it's the statement Warren Buffett famously pays the most attention to.

The Three Sections of a Cash Flow Statement

1. Cash from Operations (CFO) — The Most Important

Cash generated from the core business — selling products/services and collecting payments. This is the heartbeat of the company. It starts with PAT and adjusts for non-cash items and working capital changes.

What adds back to CFO

Depreciation (non-cash expense), decrease in inventory, decrease in receivables, increase in payables to suppliers. These all free up cash even if they didn't show in P&L.

What reduces CFO

Increase in inventory (cash locked in unsold goods), increase in receivables (money owed but not yet collected), decrease in payables. The business is consuming cash faster than it's generating.

💡 The Golden Rule: CFO should ideally be greater than PAT (Net Profit). If a company consistently earns ₹500 Cr profit but only generates ₹100 Cr in operating cash — something is wrong.

2. Cash from Investing (CFI) — Growth Signals

Cash spent on long-term investments — buying/selling plants, equipment, or other companies. This section is usually negative for growing companies (they're investing in the future) and that's perfectly fine.

Cash Outflows (negative)

Buying new factory (Capex), acquiring another company, purchasing investments/FDs. For Reliance — billions spent every year on new infrastructure is CFI outflow.

Cash Inflows (positive)

Selling old assets, divesting subsidiaries, maturity of investments. A consistently positive CFI in a growing company can be a red flag — it may mean they're selling assets to show cash.

💡 High Capex (capital expenditure) is a positive sign for a growing business — it means the company is investing in its future. But watch that this Capex is funded by operations, not debt.

3. Cash from Financing (CFF) — How It's Funded

How the company raises and repays money — from banks, investors, or shareholders. This section shows whether the company is borrowing more, repaying debt, raising equity, or returning cash to shareholders.

Inflows

Raising new bank loans, issuing new shares (IPO/FPO), issuing bonds/debentures. These bring cash in but also create obligations — debt must be repaid, shares dilute existing holders.

Outflows

Repaying loans, paying dividends to shareholders, buying back own shares. Consistent dividend payments and debt repayment from operations = financial strength.

💡 A company that consistently needs to raise debt just to fund operations (not growth investments) is a red flag. The best businesses fund themselves from operations alone.

Real Example — Infosys (Simplified)

Infosys is a textbook example of stellar cash generation. Here's a simplified version of their cash flow structure (illustrative, not exact):

Item	Amount (₹ Cr)	Meaning
PAT (Net Profit)	26,0000	Starting point from P&L
+ Depreciation & non-cash	+3,200	Added back (non-cash expense)
± Working Capital Changes	-800	Net increase in receivables etc.
Cash from Operations (CFO)	28,400	Core business cash — excellent
Cash from Investing (CFI)	-4,200	Capex on new campuses, tech investments
Free Cash Flow (FCF)	24,200	CFO minus Capex — the purest number
Cash from Financing (CFF)	-18,000	Dividends + buybacks returned to shareholders
Net Change in Cash	+6,200	Cash built up in the business

* Illustrative figures for educational purposes. Visit Screener.in for actual Infosys data.

Why Infosys is a cash machine: CFO is consistently higher than PAT, Capex is low relative to earnings (asset-light IT business), and the company returns massive cash to shareholders via dividends and buybacks. This is what a high-quality cash flow looks like.

Free Cash Flow — The Most Powerful Number

Free Cash Flow (FCF) = Cash from Operations (CFO) − Capital Expenditure (Capex). It's the cash a company generates after spending on maintaining and growing its assets. This is the money available to pay dividends, buy back shares, repay debt, or make acquisitions.

✅ Bullish

High & Growing FCF

Company generates surplus cash after all investments. Can reward shareholders or fund future growth without borrowing. Think TCS, Infosys, Nestle India.

⚠️ Watch Context

Negative FCF (Growth Phase)

Normal for companies in heavy expansion — building factories, expanding capacity. Acceptable if revenue is growing fast and CFO is improving. Common in infra, pharma, capital goods.

❌ Red Flag

Consistently Negative FCF

If FCF is negative year after year and the company keeps borrowing to stay afloat, it may never become self-funding. Be very cautious — many such companies end in distress.

What Smart Investors Check in Cash Flow

✅

CFO consistently higher than PAT

If a company earns ₹1,000 Cr profit and generates ₹1,200 Cr in operating cash — it's actually collecting more than it's booking. Companies like Nestle and TCS do this consistently. This is the gold standard.

✅

Free Cash Flow growing year over year

FCF growth means the business is becoming more efficient — generating more cash with the same (or less) capital. This is what drives long-term stock price appreciation.

✅

Dividends and buybacks funded from FCF, not debt

Companies that pay dividends from actual free cash (not by borrowing) can sustain those payments indefinitely. Check: is the total dividend paid less than CFO?

❌

PAT growing but CFO flat or falling

This divergence is a classic accounting manipulation warning sign. Check if receivables are ballooning (company booking revenue but not collecting cash). This pattern preceded several Indian corporate frauds.

❌

CFI outflows but no revenue growth

If a company is spending heavily on new assets (high Capex) but revenues aren't growing to reflect it — the investments may be unproductive or capital may be being siphoned off.

❌

Constantly raising debt to fund operations

CFF shows new loans every year while CFO is weak? The business is not self-sustaining. It's borrowing to survive. This can go on for years before imploding — see IL&FS, DHFL.

The Three Statements Working Together

No single statement tells the full story. Here's how to connect all three:

Statement	Answers	Key Number
Balance Sheet	How financially strong is the company right now?	Debt-to-Equity, Book Value
P&L Statement	Is the company profitable? Is it growing?	Revenue, EBITDA Margin, PAT
Cash Flow Statement	Is profit real? Is cash being generated?	CFO, Free Cash Flow

Where to Find Cash Flow Data in India

Screener.in

Best tool for cash flow analysis. Shows CFO, CFI, CFF and FCF across 10 years. The "Cash Flow" tab on any company page is your go-to.

Recommended

Tickertape

Clean cash flow summary with visual charts. Good for quickly checking FCF trend and comparing it to PAT over 5 years.

Good for beginners

Annual Report (BSE)

The full 3-statement cash flow with notes and auditor sign-off. Download from BSE Filings or NSE website. Essential for deep research.

Most detailed

Common Mistake

Many beginners skip the cash flow statement and only look at profit. Don't. Some of India's biggest corporate failures — from Satyam to DHFL to IL&FS — showed strong P&L numbers for years while cash flows were telling a completely different story. Always triangulate across all three statements.

Key Takeaway

The Cash Flow Statement is the reality check on the P&L. Look for CFO consistently higher than PAT, growing Free Cash Flow, and Capex funded from operations — not debt. A company that generates real cash year after year, regardless of accounting choices, is genuinely building wealth for its shareholders.

Frequently Asked Questions

What is a good CFO-to-PAT ratio?

Ideally, CFO should be equal to or greater than PAT. A ratio above 1.0 means the company is collecting more cash than it reports as profit — a very healthy sign. Ratios consistently below 0.8 warrant investigation. For asset-heavy businesses (steel, cement), it may be lower due to large working capital needs; for asset-light businesses (IT services, FMCG), it should be well above 1.0.

What is "Working Capital" and why does it affect cash flow?

Working capital is the short-term capital tied up in running operations — inventory + receivables − payables. When a company grows fast, it often needs more working capital (locking up cash in inventory and receivables). This reduces CFO even when profits are rising. Efficient companies (like HUL with its strong supplier terms) have negative working capital — their suppliers fund their operations, which boosts CFO.

Why is depreciation added back in CFO?

Depreciation is a non-cash expense — it reduces reported profit on the P&L but no cash actually leaves the bank. Since the cash flow statement focuses on real cash movements, depreciation is added back to PAT. This is why asset-heavy companies (steel, cement) often show CFO much higher than PAT — large depreciation charges reduce profit but not cash.

What is "maintenance Capex" vs "growth Capex"?

Maintenance Capex is spending just to keep existing assets running — replacing old machinery, maintaining plants. Growth Capex is spending on new capacity to expand. The distinction matters because only growth Capex should generate future revenue. A company spending heavily on maintenance alone (while keeping capacity flat) has an aging asset base — a long-term concern. Unfortunately, companies don't always split these in filings, so investors often estimate it from depreciation figures.

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Module 2 Complete!

You can now read all three financial statements. Time to learn how to use them to calculate ratios and find great stocks.

Up Next: Financial Ratios — Module 3

Profit & Loss Statement