Five questions to ask of any cash flow statement
A cash flow statement is only useful if you know what to ask it. This lesson gives five questions that analysts return to again and again, lets you test a made-up company against them, and answers them for Titan and Info Edge across two years. It also shows where a ratio can mislead.
- Level
- Beginner
- Reading time
- About 24 minutes
- Know this first
- Free cash flow
By the end you will be able to:
- ask whether a profit is backed by cash, and compare cash from operations with profit
- explain a gap between profit and cash from the working capital lines
- compare spending on fixed assets with depreciation, and free cash flow with profit and dividends
- say when a ratio compares figures struck on different footings
Why ask questions, not compute ratios
The four lessons before this one covered how cash flow statements are built. Reading one is a different skill. A page of numbers does not announce what matters, and a ratio computed without a question behind it is just a number. Analysts who read cash flow statements for a living tend to ask the same small set of questions every time. This lesson gives five of them. Each has a ratio that answers it roughly, and a next step for when the answer looks odd.
All five use figures already in the statements you have met: profit, cash from operations, the working capital lines, depreciation, spending on fixed assets and dividends. None needs a spreadsheet beyond a pocket calculator.
Test a company
Below is a company that earns a profit of ₹10,00,000 after tax and charges ₹3,00,000 of depreciation. Change what its operations produced in cash, what it spent on fixed assets, and the dividend it pays. The right-hand ledger shows the ratios that answer the first, third and fourth questions, and the sentence underneath reads them in plain words.
Cash from operations is 0.70 times profit, a moderate gap that is worth explaining from the working capital lines. Capex is 1.33 times depreciation, so the company is spending at least as much as its assets wear out. Free cash flow covers the dividend, with ₹1,00,000 to spare.
Try three experiments. First, drop cash from operations to ₹3,00,000 and keep everything else: the same profit is now mostly absent from the bank, and the sentence tells you so. The next step would be to find out where it went, which is a question for the working capital lines. Second, cut spending on fixed assets to ₹1,00,000. Free cash flow looks wonderful, but spending has fallen well below depreciation, and the company may be using up its assets faster than it replaces them. Third, raise the dividend until free cash flow no longer covers it. The statement does not say the dividend is unwise, only that it needs a source other than the year's free cash flow.
The five questions
1. Is the profit backed by cash?
Divide cash from operating activities by profit after tax. A figure near or above 1 says the profit arrived as cash. A figure well below 1 says some of it is sitting elsewhere, usually in receivables or stock. It does not say it is lost. The lesson on cash vs profit showed a profitable business with little cash, and this ratio is the quick check for that pattern. If it is low, go to the working capital lines.
2. What is working capital doing?
Divide the total of the working capital lines by operating profit before working capital changes. A negative share means working capital absorbed cash, as it does when a business is growing or building stock. A positive share means it released cash, which can be healthy, such as faster collection, or temporary, such as stretching payments. Compare it with the cycle days of the lesson on working capital and the cash cycle.
3. Is the business replacing what it uses?
Divide spending on fixed assets by depreciation. A figure above 1 means it is spending more than its assets wear out, which is typical of a business that is growing. A figure persistently below 1 can mean it is under-investing, or that its depreciation includes charges on assets it did not buy that year. Depreciation lines in these statements can include the charge on leased premises, which the spending line does not, so the ratio is a rough guide, not a verdict.
4. What is left after reinvesting?
Divide free cash flow by profit. It is question 1 once the cost of keeping the business going has been deducted. A company can have cash from operations equal to profit and still leave little after investing.
5. Who gets paid out of it?
Divide dividends by free cash flow, and look at how much was borrowed. A dividend well covered by free cash flow comes from the business. One that is not covered comes from borrowing, savings or the sale of investments. That can be fine for a year, and not for ever.
The five questions, answered for Titan and Info Edge
Each figure below comes from lines you have already seen. Titan is in ₹ crore, Info Edge in ₹ million. The ratios do not depend on the unit. Titan's dividend and borrowing detail is available for FY2023-24 only, because the previous year's financing lines could not be separated reliably in the filing text.
| Question and ratio | Titan FY2023-24 | Titan FY2022-23 | Info Edge FY2023-24 | Info Edge FY2022-23 |
|---|---|---|---|---|
| 1. Cash from operations ÷ profit after tax | 0.57 | 0.54 | 1.00 | 1.92 |
| 1a. The same, with Info Edge's profit before exceptional items, less tax | 0.57 | 0.54 | 0.98 | 1.12 |
| 2. Working capital change ÷ operating profit before working capital | −38% | −39% | +14% | +19% |
| 3. Spending on fixed assets ÷ depreciation | 1.18 | 0.79 | 0.38 | 1.29 |
| 4. Free cash flow ÷ profit after tax | 0.42 | 0.46 | 0.97 | 1.77 |
| 5. Dividends ÷ free cash flow | 59% | n/a | 30% | 26% |
Titan
Cash from operations was 0.57 of profit in FY2023-24 and 0.54 in FY2022-23: ₹2,030 crore of cash against ₹3,544 crore of profit. The second row says why. Working capital absorbed ₹1,946 crore in FY2023-24, and ₹1,922 crore of that was stock. As an illustration, had the stock not grown, cash from operations would have been about ₹3,952 crore, 1.12 times the profit. So the gap between profit and cash is mostly a decision to hold more jewellery, not a sign that profit was missing. What is worth monitoring is whether the stock turns, and the working capital lesson showed that inventory days fell.
The capex row swings: spending was 1.18 times depreciation in FY2023-24 (₹529 crore against ₹447 crore) and 0.79 the year before (₹288 crore against ₹364 crore). One year of each should not be read as a trend. Free cash flow of ₹1,501 crore was 0.42 of profit, and the dividend of ₹888 crore was 59% of it. Titan raised ₹4,619 crore of borrowing that year, so a good share of what it paid out and invested was funded by lenders.
Info Edge
Cash from operations was 1.00 times profit in FY2023-24, which looks like profit and cash moving together. In FY2022-23 it was 1.92, which would look like cash far ahead of profit. Look at the footing. Profit after tax in FY2022-23 was ₹4,111.93 million, after an exceptional loss of ₹2,947.45 million, but cash from operations starts before exceptional items. Compare like with like, cash against profit before exceptional items less tax of ₹7,059.38 million, and the ratio is 1.12. The original 1.92 was mostly the difference between two measures struck on different bases. Share based payments of ₹794.28 million, which cost no cash, and a working capital release of ₹1,687.85 million push cash above profit. Items such as interest income, which the statement files under investing, pull the other way.
Working capital released cash in both years, ₹1,687.85 million in FY2022-23 and ₹1,379.93 million in FY2023-24, which is the opposite of Titan. Spending on fixed assets was 0.38 times depreciation in FY2023-24 (₹257.19 million against ₹677.38 million) and 1.29 in FY2022-23. Free cash flow was 0.97 of profit in FY2023-24, dividends took 30% of free cash flow, against 26% a year earlier, and net borrowing was ₹4.05 million. This is a company paying out of what it earns.
What the ratios cannot tell you
They are a way of asking better questions, and they have limits that are worth knowing.
- One year is a sample. Capex, working capital and tax all swing. Titan's capex ratio was above 1 in one year and below 1 in the other.
- Footing matters. A ratio is only meaningful if both figures are measured on the same basis, as the Info Edge row 1a shows.
- Classification differs. Interest paid, lease payments and gold on loan can sit in different sections in different companies, so cash from operations is not always like for like.
- Industry sets the range. A jeweller holding stock and a software business with none will have different normal values for every ratio here.
- Neither high nor low is a verdict. A cash conversion of 0.57 can be a sign of healthy growth, and 1.00 can come from running down stock. The ratio asks the question, and the statement and notes answer it.
Does profit turn into cash year after year?
A single year of cash conversion can mislead; two years begin to show a pattern. The table gives cash from operations as a share of net income for Apple, Microsoft and Toyota in their last two fiscal years.
| Cash from operations as a share of net income | Prior year | Latest year |
|---|---|---|
| Apple | 126.2% | 99.5% |
| Microsoft | 134.5% | 133.7% |
| Toyota | 82.9% | 77.2% |
Microsoft's ratio stayed above 130% in both years (134.5% and 133.7%), which is a stable pattern driven by large depreciation and by customers who pay in advance. Toyota's stayed below 100% (82.9% and 77.2%), consistent with a business that lends to customers as part of its operations. Apple's moved from 126.2% to 99.5%, a swing mostly from working capital, which released cash in one year and absorbed it in the next. A ratio that holds steady is easier to trust than one that swings, though a swing needs an explanation and not an alarm.
Four checks side by side
The next table runs four of the checks from this lesson on the latest year of each company. The first repeats the conversion above, the second asks whether capital spending is keeping pace with depreciation, the third asks how much of operating cash flow rests on share-based pay, and the fourth measures free cash flow against profit.
| Latest year | Cash from operations / net income | Capital spending / depreciation | Share-based pay / cash from operations | Free cash flow / net income |
|---|---|---|---|---|
| Apple | 99.5% | 1.09× | 11.5% | 88.2% |
| Microsoft | 133.7% | 1.89× | 8.8% | 70.3% |
| Toyota | 77.2% | 0.85× (2.18× with leased equipment) | not shown | 37.4% |
Capital spending was 1.09 times depreciation at Apple and 1.89 times at Microsoft. A ratio above one means the company is adding to its asset base, and Microsoft is doing so at a pace that explains why its free cash flow lags its profit. Toyota's own capital spending was 0.85 times depreciation, but with the equipment it leases to others, it is 2.18 times. Toyota's reported depreciation covers the whole group, so the second ratio, which counts all of its capital spending, is the closer match.
Share-based pay is a cost that reduces profit and, being paid in shares, does not reduce cash, so operating cash flow is flattered by it. It was 11.5% of operating cash flow at Apple and 8.8% at Microsoft. If you treat it as a real cost of paying employees, free cash flow falls to $85,904 million at Apple and $59,637 million at Microsoft. Whether to make that adjustment is a judgement, and the useful habit is to look at both versions.
Comparing across countries
Quality checks are only as comparable as the cash flow classifications beneath them. Interest paid is an operating cash flow under US GAAP and may be operating or financing under IFRS, and dividends paid may be operating or financing under IFRS but are always financing under US GAAP. Development costs that US GAAP expenses within operating cash flow can be an investing outflow under IFRS. A strong conversion ratio at an IFRS company may partly reflect these choices, so check the accounting policy note before drawing a conclusion. Better still, compare each company against its own history, which holds the policy constant.
Common mistakes
Comparing figures on different footings
Profit after exceptional items set against cash from operations before them turned a ratio of 1.12 into 1.92 for Info Edge in FY2022-23. Always check what each figure includes.
Treating a low cash-to-profit ratio as proof of poor earnings
Titan's ratio of 0.57 was mostly stock built up to sell. A low ratio is a prompt to read the working capital lines, not a conclusion.
Using a single year
Look at three to five years where you can. Patterns that repeat tell you more than a figure that happened once.
Ignoring what the ratio leaves out
None of the five questions shows how much debt a company has, how safe its customers are or whether its profit comes from the main business. They need their own questions.
Comparing across industries without adjusting expectations
A retailer's inventory and a software firm's absence of it make their ratios incomparable. Compare with rivals and with the same company's history.
Try it yourself
1. A company earns a profit after tax of ₹40 lakh and has cash from operations of ₹30 lakh. What is the first ratio, and what should you look at next?
Show the working
30 ÷ 40 = 0.75. About a quarter of the profit is not in cash from operations. Look at the working capital lines: a rise in receivables or stock would explain it.
2. A company spent ₹12 lakh on fixed assets and charged ₹20 lakh of depreciation. What is the ratio, and what might it mean?
Show the working
12 ÷ 20 = 0.6. It spent less than its assets wore out. It may be under-investing, or it may have a large asset base that needs little replacement, or the depreciation may include charges on leased assets. Look at several years and at the notes.
3. Free cash flow is ₹10 crore and the dividend is ₹15 crore. What does this say?
Show the working
The dividend is not covered. ₹5 crore has to come from elsewhere, such as borrowing, savings or selling investments. One year is not alarming, but a pattern would be.
4. Titan's cash from operations in FY2023-24 was 0.57 times its profit. Using the working capital lines, what explains most of the gap?
Show the working
Working capital absorbed ₹1,946 crore, of which stock accounted for ₹1,922 crore. Without the stock increase, cash from operations would have been about ₹3,952 crore, above profit.
Where this is used
- An analyst screening companies uses cash-to-profit as a first filter, then reads the working capital lines of the ones that fall below it.
- A lender looks at free cash flow against interest and repayments, with the capex ratio to judge whether the business is being kept in repair.
- An auditor compares profit and cash movements to find unusual relationships that may call for closer testing.
- An investor tracks the dividend against free cash flow to see whether a payout is being earned or borrowed.
Key terms
- Cash conversion
- Cash from operations as a share of profit. Also called the cash-to-profit ratio.
- Quality of earnings
- How far reported profit reflects cash and repeatable business, as opposed to accounting entries and one-off gains.
- Capex to depreciation
- Spending on fixed assets divided by the depreciation charge: a rough sign of whether assets are being replaced.
- Dividend cover
- How many times a dividend could be paid from a measure of profit or cash.
- Footing
- The basis on which a figure is measured, such as before or after exceptional items.
- Asset-light
- A business that needs few fixed assets to earn its revenue.
Questions people ask
What is a good cash-to-profit ratio?
There is no single answer. Over several years, a ratio near or above 1 suggests profit is turning into cash. A lower ratio is normal for a business that is growing or holds large stock, but it should be explained by the working capital lines.
Can cash from operations be higher than profit for a long time?
Depreciation and other non-cash charges keep it above profit in many businesses, as in Info Edge's case. If it stays far above profit because working capital keeps releasing cash, ask whether that can continue.
Do these ratios apply to banks?
Not in the same way. A bank's main business is lending, and for it interest and loans are operating items, which changes what each section contains. These five questions are written for companies that make or sell things or services.
Where do I find the figures?
In the company's annual results. Cash from operations, the working capital lines, spending on fixed assets, dividends and borrowings are all lines in the cash flow statement. Profit and depreciation are in the income statement.
Sources and review
- Titan Company Limited, audited results with statements of cash flows for the year ended 31 March 2024, filed with BSE. Source of every Titan cash flow line.
- Titan Company Limited, audited standalone and consolidated financial results for the year ended 31 March 2024, filed with BSE. Source of profit after tax and depreciation.
- Info Edge (India) Limited, audited standalone financial statements, Q4 FY24. Source of every Info Edge figure.
- IFRS Foundation, IAS 7, Statement of Cash Flows, for the definitions of operating, investing and financing activities used in the ratios.
- Apple Inc., Form 8-K, Exhibit 99.1: fourth quarter and full-year fiscal 2025 results, filed with the US Securities and Exchange Commission. Source of Apple's statements.
- Microsoft Corporation, Form 8-K, Exhibit 99.1: fourth quarter and fiscal year 2025 results, filed with the US Securities and Exchange Commission. Source of Microsoft's statements.
- Toyota Motor Corporation, FY2025 Financial Summary (IFRS, unaudited, in millions of yen), furnished to the US Securities and Exchange Commission on Form 6-K. Source of Toyota's statements.
- Deloitte, Roadmap: IFRS and US GAAP comparison, 4.3 Statement of cash flows, for the classification of interest and dividends.
- PwC, IFRS and US GAAP: Similarities and differences, internally developed intangible assets, for research and development costs.
How the numbers were checked: every cash flow, working capital and income statement figure comes from lines that were added up and matched the printed totals. Each ratio was recomputed from those figures, and the footing adjustment for Info Edge uses printed profit before exceptional items and total tax. The calculator was tested against separate arithmetic across thousands of slider combinations.