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Cash Flow
Financial
★★★★★
Cash flow tracks actual cash inflows and outflows, revealing the real cash-generating condition of a business.
Explanation
Cash flow is often more difficult to manipulate than accounting profit. Investors use operating cash flow, free cash flow, and cash conversion to judge earnings quality, solvency, and dividend sustainability.
Formula
Free cash flow = operating cash flow - capital expenditure✓ When to Use
- • Evaluate earnings quality
- • Assess debt repayment capacity
- • Judge whether dividends and growth are supported by real cash
✗ Not For
- • Not suitable as the only basis for an investment decision.
- • Less reliable when financial data is distorted by one-off events.
- • Hard to compare directly across very different industries or business models.
⚠ Common Mistakes
- ▸ Focusing only on net profit while ignoring cash conversion
- ▸ Ignoring working-capital changes
- ▸ Treating one-period cash flow as a long-term trend
FinancialsCash Flow