STOP focusing on Profit

START focusing on Cash Flow

Cash Flow Statement 101:

Every company has 3 reports in its financial statements

1. Balance sheet
2. Income statement
3. Cash flow statement
Most people focus on the Income Statement to look at PROFIT

There is nothing wrong with this…

But profit, isn’t CASH FLOW
Profit is an accounting measure

It doesn’t tell you how much MONEY actually came into the business
Sounds confusing?

Let’s look at an example:

In 2021 Google’s profit was: $76 billion
You would think that if Google’s profit was $76 billion...

The cash in Google's bank account would also increase by $76 billion?

Not quite..
If you look at Google’s bank account,

From 2020 to 2021, CASH actually went DOWN ⬇️

From $26.4 billion to $20.9 billion

This is a reduction of $5.5 billion
So let’s get this straight…

Google MADE $76 billion in profit

But its cash balance went DOWN by almost $5.5 billion?

If a company makes a profit, shouldn’t its cash balance go up?!?

What's going on here?!
How can we uncover this mismatch between profit and cash?

By looking at the CASH FLOW statement
The cash flow statement tells you 3 things:

1. How PROFIT was converted into CASH

2. How that cash was used

3. How you got the cash balance in your bank account
In the case of Google,

The Cash Flow Statement starts with $76 billion in profit

And ends with a decrease of $5.5 billion in cash
In essence, the Cash Flow Statement is saying:

In 2021:

Google Made a PROFIT of $76 billion

But lost $5.5 billion of Cash

Let’s dig into why this happened:
As you can tell from the graphic, the cash flow statement has three sections:

1. Cash flow from Operating Activities
2. Cash flow from Investing Activities
3. Cash flow from Financing Activities

We’ll cover each of them:
Cash flow from Operating Activities

Tells you:

• How profit was converted into cash
• How much cash the business made
In the case of Google,

The company made $76 billion of profit in 2021

But it actually collected COLD HARD cash of $91.6 billion during the year

Cash collected at Google was HIGHER than Profit!
Cash flow from Investing Activities

Tells you:

• What assets did the company buy?
• Did the company do any M&A?
In the case of Google,

The company spent $35.5 billion buying:

• Property and equipment
• Marketable securities (bonds and stocks)
• Making acquisitions (M&A)
Cash flow from Financing Activities

Tells you:

• Did the company raise money from investors?
• Did the company get a loan?
In the case of Google

The company spent $61.3 billion on:

• Buying back stock
• Paying back debt
• Issuing stock rewards
So the final tally is:

• Cash Flow from Operating Activities: $91.6 billion

• Cash Flow from Investing Activities: ($35.5) billion

• Cash Flow from Financing Activities: ($61.3) billion

The sum makes up the decrease in cash of ($5.5) billion

(minor diff. due to f/x)
So what does this mean?

It means Google generates INSANE amounts of cash to the tune of $91 billion per year

However, the company also SPENDS all of this cash

It is spent on FINANCING and INVESTING activities until it’s in a negative position of $5.5 billion
Is this a bad thing?

No.

If Google is investing in new equipment, that’s probably a good long-term decision for the company

If Google is buying back stock, that rewards its shareholders
You’re probably asking yourself….

But if Google made $91 billion in cash, shouldn’t it keep some of itself?

Google can actually afford to go into a negative cash position because its balance sheet is actually FLUSH with CASH
At the end of 2021, Google had $20.9 billion of cash

Google also had $118.8 billion of marketable securities (stocks and bonds) that can be sold and converted to cash.
So Google’s total cash + marketable securities otherwise called “cash equivalents” balance was $139.6 billion
Hopefully, now it’s starting to make sense why the company doesn’t need to keep its cash and it can spend it all...

The company already has so much CASH on hand!
Adding another $91 billion is not necessary

The executives at Google chose to spend the cash on investments and give it back to shareholders instead of adding more cash to the company's bank account
TL;DR

• Profit is an accounting measure

• Profit doesn’t tell you how much CASH was made

• Uncover the mismatch between profit and Cash Flow

• The Cash Flow Statement explains How PROFIT was converted into CASH
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More from Accounting

Building conviction on existing portfolio stocks is complex topic. I am still learning and have only 2-3 years exp. Lot of learning is inspired from @varinder_bansal as part of omkara family, listening to old colleage @connectgurmeet on news channel and @unseenvalue posts

https://t.co/KQkupOeFzp financial statements and results on quarterly basis to evaluate whether your thesis on company is still intact through growth in revenue, profits and cash. You cannot rely only on whats app forwards or brokerage updates.

2.Quarterly Con-Calls post result covering enviornment of the sector in which company operates, future expansion plans, & companies confidence in responding to fund managers. (For eg, in my evening walks, i listen to con-calls on You tube rather than music to utilize the time.)

3. High conviction is build when you compare py qtr or py year con call scripts and see whether company giving forward statements were met in subsequent quarters or not. For eg company said they will be doing CAPEX for 100 crores in FY 2020 and then we can see current state.

4. Profits not growing qtr or qt or yr on yr is not the sign for low conviction. You need to screen the balance sheet to see if the company has taken huge R&D expenditure which they believe is right for company as they build new products for future years, then that make sense

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हिमालय पर्वत की एक बड़ी पवित्र गुफा थी।उस गुफा के निकट ही गंगा जी बहती थी।एक बार देवर्षि नारद विचरण करते हुए वहां आ पहुंचे।वह परम पवित्र गुफा नारद जी को अत्यंत सुहावनी लगी।वहां का मनोरम प्राकृतिक दृश्य,पर्वत,नदी और वन देख उनके हृदय में श्रीहरि विष्णु की भक्ति अत्यंत बलवती हो उठी।


और देवर्षि नारद वहीं बैठकर तपस्या में लीन हो गए।इन्द्र नारद की तपस्या से घबरा गए।उन्हें हमेशा की तरह अपना सिंहासन व स्वर्ग खोने का डर सताने लगा।इसलिए इन्द्र ने नारद की तपस्या भंग करने के लिए कामदेव को उनके पास भेज दिया।वहां पहुंच कामदेव ने अपनी माया से वसंतऋतु को उत्पन्न कर दिया।


पेड़ और पौधों पर रंग बिरंगे फूल खिल गए और कोयलें कूकने लगी,पक्षी चहकने लगे।शीतल,मंद,सुगंधित और सुहावनी हवा चलने लगी।रंभा आदि अप्सराएं नाचने लगीं ।किन्तु कामदेव की किसी भी माया का नारद पे कोई प्रभाव नहीं पड़ा।तब कामदेव को डर सताने लगा कि कहीं नारद क्रोध में आकर मुझे श्राप न देदें।

जैसे ही नारद ने अपनी आंखें खोली, उसी क्षण कामदेव ने उनसे क्षमा मांगी।नारद मुनि को तनिक भी क्रोध नहीं आया और उन्होने शीघ्र ही कामदेव को क्षमा कर दिया।कामदेव प्रसन्न होकर वहां से चले गए।कामदेव के चले जाने पर देवर्षि के मन में अहंकार आ गया कि मैने कामदेव को हरा दिया।

नारद फिर कैलाश जा पहुंचे और शिवजी को अपनी विजयगाथा सुनाई।शिव समझ गए कि नारद अहंकारी हो गए हैं और अगर ये बात विष्णु जी जान गए तो नारद के लिए अच्छा नहीं होगा।ये सोचकर शिवजी ने नारद को भगवन विष्णु को ये बात बताने के लीए मना किया। परंतु नारद जी को ये बात उचित नहीं लगी।