Cash flow: Why cash matters more than reported profit
Why cash from operations matters more than reported profit, and why negative operating cash flow with rising profit is one of the biggest red flags.
Profit is an opinion. Cash is a fact.
| Measure | FY20 | FY21 | FY22 | FY23 | FY24 |
|---|---|---|---|---|---|
| Net profitleft after interest and tax, ₹ crore | 120 | 140 | 165 | 190 | 220 |
| Cash from operationscash actually collected, ₹ crore | 125 | 118 | 90 | 20 | -35 |
| Cash ÷ profithow much profit became cash | 1.0× | 0.8× | 0.5× | 0.1× | -0.2× |
Profit is counted when a sale is booked, even if the customer hasn’t paid. Cash from operations counts only money that actually arrived. Over a few years, the two should roughly match.
What to look for
- Cash from operations: cash the business itself generated.
- Cash ÷ profit: near 1× is healthy. Well below 1× year after year is a warning.
- Negative operating cash while profit grows is one of the biggest red flags there is.
Salaries, suppliers and lenders are paid in cash, not in reported profit.
In FY24 the company reported ₹220 crore of profit, but cash from operations was minus ₹35 crore. What’s the most likely reason?
- Customers haven’t paid for the sales yet, or stock is piling up unsold
- The company paid too much tax
- Cash flow is always lower than profit, so this is normal
Show the answer
Customers haven’t paid for the sales yet, or stock is piling up unsold. Profit was booked, but the money is stuck: in unpaid customer bills (receivables) or unsold stock (inventory). It may never arrive.
What the numbers showed
In FY24 reported profit hit a record ₹220 crore while the business actually lost ₹35 crore of cash.
Salaries, suppliers and lenders are paid in cash, not in reported profit.
Practise Cash flow, free
Reading about it is step one. In MarketSeekho you look at a company’s numbers, make a call, say why, and get graded on your reasoning, not luck.
Common questions
What is Cash flow?
Profit is counted when a sale is booked, even if the customer hasn’t paid. Cash from operations counts only money that actually arrived. Over a few years, the two should roughly match.
What should I look for in cash flow?
Cash from operations: cash the business itself generated. Cash ÷ profit: near 1× is healthy. Well below 1× year after year is a warning. Negative operating cash while profit grows is one of the biggest red flags there is.
In FY24 the company reported ₹220 crore of profit, but cash from operations was minus ₹35 crore. What’s the most likely reason?
Customers haven’t paid for the sales yet, or stock is piling up unsold. Profit was booked, but the money is stuck: in unpaid customer bills (receivables) or unsold stock (inventory). It may never arrive.
How can I practise cash flow for free?
MarketSeekho has a free four-page chapter on Cash flow (learn, answer a question, spot it in a company’s numbers, then make a call) and an unlimited Spot the red flag practice game graded on your reasoning. No sign-up or money needed.