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How to understand cash flow

Profit is an accounting number. Cash is what actually comes in and goes out.

Click any Tap any word with a dotted underline to see what it means.

A company can report a profit and still be short of cash, or report a loss while cash keeps coming in. That's because accounting records some income and costs at different times from when the money actually moves. For example, a sale counts as revenue the day it is made, even if the customer only pays three months later.

What to look at

• Cash from operations: the cash the everyday business brings in.
• Capital expenditures: the cash spent on long-term things like factories and data centers.
• Free cash flow: what's left after both. It is the cash available for paying debt, dividends, share buybacks or new projects.

Questions to ask yourself

• Has free cash flow been positive in most of the last five years?
• Is it moving in the same direction as net income? If the two differ a lot for several years, why?
• If free cash flow is negative, is the company spending heavily on investments that might pay off later, or is the everyday business using up cash?