Stock Market · Fundamental Analysis

Cash flow statement

The cash flow statement shows actual cash movement in and out of the business, not accounting profits. This makes it the most difficult to manipulate and the most trustworthy financial statement.

Three sections

1. Cash Flow from Operations (CFO): cash generated by the core business. This is the most important line.

2. Cash Flow from Investing (CFI): cash spent on or received from investments (buying/selling assets, capex, acquisitions). Usually negative for growing companies.

3. Cash Flow from Financing (CFF): cash flows from borrowing, repaying loans, issuing shares, paying dividends.

> Net cash = CFO + CFI + CFF. Should be consistently positive for healthy companies.

The most important metric: Free Cash Flow

Free Cash Flow (FCF) = CFO − Capital Expenditure (Capex)

FCF is the cash left after maintaining and growing the business. Companies with high, consistent FCF can pay dividends, buy back shares, reduce debt, or make acquisitions, without needing external capital.

• High PAT (net profit) + Low/Negative CFO = Warning. Profits may not be real.
• Moderate PAT + High CFO = Excellent. Cash is real even if accounting shows less profit.

Consistent positive FCFThe hallmark of a truly excellent business

What this looks like in practice

The best large-cap IT services, consumer-staples and decorative-paints businesses consistently generate high FCF. They need little debt and reinvest efficiently. This is what separates great businesses from mediocre ones.

Always check CFO vs PAT. If a company reports ₹500 crore profit but operating cash flow is ₹50 crore. Find out why. The answer is usually in the balance sheet.

Takeaway. Cash flow from operations must support reported profits. Free cash flow = CFO − Capex. High FCF with low debt is the signature of a genuinely excellent business.