Reading a cash flow statement

Profit can be manipulated; cash is harder to fake. The cash flow statement tracks the actual movement of money in and out of the business during a period. A company can show healthy profits on the P&L while simultaneously running out of cash, this disconnect is one of the most important early-warning signals in fundamental analysis.

The statement is divided into three sections that answer three questions: How much cash did operations generate? How much did the company spend on growing or maintaining its asset base? How did it fund itself, through debt, equity, or by returning cash to shareholders?

In practice, the operating cash flow section is the most scrutinised. A consistently profitable company that generates weak or negative operating cash flow deserves deeper investigation.

Three sections under Ind AS 7 (indirect method for CFO):

1. Operating Cash Flow (CFO) Starts with PAT, then adds back non-cash charges and adjusts for working capital changes:

• Add: D&A, impairment, finance costs (re-added since classified separately)
• Adjust: Increase in receivables → negative; Decrease in inventory → positive; Increase in payables → positive
• Less: Taxes paid

2. Investing Cash Flow (CFI)

• Capital expenditure (purchase of PP&E), usually negative
• Proceeds from asset sales
• Investments in subsidiaries, acquisitions

3. Financing Cash Flow (CFF)

• Proceeds from / repayment of borrowings
• Dividends paid
• Equity raised (rights issue, QIP)

Free Cash Flow (FCF) = CFO − Maintenance Capex This is the cash available to all capital providers after sustaining the business. Analysts often use FCF yield (FCF ÷ Market Cap) as a valuation metric.