Lesson 04 — Cash Flow Red Flags
Week 06 · Lesson 4 of 4 · Week 06 — Cash Flow Basics
Either the company has aggressive revenue recognition, rising receivables, or is capitalising expenses. Profit says business is improving, but cash says othe...
When cash flow tells a different story than profit
If profit is high but cash is low — something's wrong
Either the company has aggressive revenue recognition, rising receivables, or is capitalising expenses.
Top 5 red flags
1. PAT growing, CFO shrinking
Profit says business is improving, but cash says otherwise. Likely cause: revenue booked on credit, inventory build-up.
2. CFO consistently below PAT
CFO/PAT < 0.8 for 3+ years = poor cash conversion.
3. Rising Capex funded by debt
If capex is funded entirely by borrowings (not CFO), the company is leveraging up to grow — risky.
4. Large "Other Income" with weak CFO
Paper profits (fair value gains, unrealised forex) inflate PAT but don't generate cash.
5. Negative FCF for 5+ years
A company that never generates free cash flow is destroying value — it constantly needs external funding.
The ideal cash flow pattern for a quality company
| Section | Ideal |
|---|---|
| CFO | Positive and growing |
| CFI | Negative (investing for growth) |
| CFF | Negative (paying back investors) |
| FCF | Positive |
🗣️
"Acchi company: business se paisa aata hai, invest hota hai, aur investors ko bhi milta hai."
Key takeaway
Always cross-check profit with cash flow. When they disagree, trust the cash flow.