Reading a Cash Flow Statement

Profit is an estimate. Cash is a count.

A company books revenue when it delivers the goods, not when the customer pays. It spreads the cost of a factory over twenty years as depreciation, even though the money left on day one. Both are sensible accounting, and both mean that reported profit is partly a judgement.

The cash flow statement strips the judgement out. It records rupees that actually came in and rupees that actually went out, in three groups:

• Operating activitiesCash from the actual business: customers paying, suppliers and staff being paid, tax paid. The line that matters most.
• Investing activitiesCash spent on or received from plants, equipment, acquisitions and investments. Negative for most growing companies.
• Financing activitiesCash from borrowing or issuing shares, and cash paid out as dividends, buybacks, interest and debt repayment.

Cash from operations is the one to read first. Investing tells you what the company is building. Financing tells you who is paying for it.

The statement starts from profit and works back to cash

Almost every Indian company uses the indirect method. It does not list receipts and payments. It starts from profit before tax and adjusts, line by line, for everything that was not cash. Once you know the four kinds of adjustment, the page reads itself.

Here is the made-up ₹500 crore company from further down, walked from profit to cash:

Real statements have more lines: tax paid, interest, provisions, gains on selling investments. They all fall into the same four kinds. Expenses with no cash are added back. Money tied up in customers or stock is subtracted. Money held back from suppliers is added. Gains that aren't operating cash are removed.

Cash per ₹100 of profit is the most useful single check

Divide cash from operating activities by net profit and multiply by 100. Over several years, a healthy company lands around ₹100 or above.

Reliance is far above ₹100 for two reasons. It charged ₹57,688 crore of depreciation in FY26, which reduces profit but takes no cash that year. And its ₹27,061 crore of interest sits under financing rather than operations, as most Indian companies report it. TCS sits close to ₹100 because it has little to depreciate and almost no debt: its profit and its cash are nearly the same thing.

Read five years, never one

A single year can mislead in either direction. A large customer may have paid on 2 April instead of 30 March. Here are all three companies over five years:

Maruti's FY22 on its own looks alarming: ₹3,880 crore of profit, and only ₹1,840 crore of operating cash. The next four years all came in above ₹100. That is what a timing problem looks like: one bad year, then a clean run.

The pattern to worry about is the opposite: below ₹70 for three or four years in a row, with receivables growing faster than sales. That is the one worth digging into before you buy.

Try it on any company. The checker below starts with Maruti's figures; replace them with five years from the company's annual report or Screener.in.

Free cash flow is what owners could actually take out

Capital expenditure is the "purchase of fixed assets" line under investing activities. What remains is money the company could pay out as dividends, buybacks or debt repayment without borrowing.

Free cash flow, ₹ crore, as reported by Screener.in:

This is where Reliance's ₹190 of operating cash per ₹100 of profit looks very different. Over five years it earned ₹3,98,016 crore of profit, but free cash flow was ₹1,29,190 crore, about a third of that. The rest went back into plants and networks. In FY23, capital spending took more than all of its operating cash.

That can be fine. A company building capacity will have low or negative free cash flow for a few years. The question is whether the spending later turns into more operating cash. Reliance's free cash flow has risen every year since FY23, to ₹70,023 crore in FY26. Its ₹2,37,686 crore of unfinished capital work, on its balance sheet, has not yet been tested this way.

Financing shows who pays for the growth

• Healthy: operating cash pays for capital spending, and what is left goes to dividends or to repaying debt. Financing cash flow is negative.
• Worth a question: capital spending is larger than operating cash every year, and the gap is filled with new borrowing. Look for the moment the spending is supposed to start paying back.
• Warning: borrowing pays the dividend. If operating cash cannot cover the dividend, the dividend is being paid with a loan.

Two real examples. Over five years TCS generated ₹2,10,582 crore of free cash flow, and its financing outflows (mostly dividends and buybacks) were ₹2,19,566 crore. It hands back essentially everything it makes, and it can because it needs so little capital.

Reliance shows the other shape. In FY22 and FY23, financing brought money in, ₹17,289 crore and ₹10,455 crore, because borrowing helped pay for the building. By FY26 financing was ₹51,549 crore out, as free cash flow rose enough to cover interest, dividends and repayments. That shift is the "moment the spending pays back", visible in one line of the statement.

Where this check does not work

Banks, NBFCs and insurers are the exception. For a lender, making a loan is an operating cash outflow, so a fast-growing bank can show hugely negative operating cash flow while being perfectly healthy. Judge lenders on asset quality, capital adequacy and return on assets instead.

Read a cash flow statement in this order

1. Operating cash against profitFive years of both, side by side. Around ₹100 of cash per ₹100 of profit or better is healthy; persistently below ₹70 needs an explanation.
2. Working capital linesChanges in receivables and inventory, inside operating activities. Are they growing faster than revenue?
3. Capital expenditurePurchase of fixed assets, under investing. Subtract it from operating cash for free cash flow.
4. How the gap is fundedUnder financing: are dividends and capital spending paid from operating cash, or from new debt and share issues?

Questions people actually ask