📊 Example 1: a natural resources company. Profit vs. Cashflow
📌 Year: 2024
📌 Currency: USD
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🔹 High Profit, Negative Cashflow – What’s Happening?
On paper, company A looks highly profitable, reporting $170 million in net profit for 2024.
But a deeper look at its cashflow statement tells a different story:
💰 Net Profit: $170 million
💰 Free Cashflow: -$298 million
Instead of generating cash, company A actually burned $298 million in 2024.
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🔎 Why is Cashflow Negative Despite High Profit?
📌 1️⃣ Large Investment Spending
• Company A spent heavily on investments, likely in renewable energy projects.
• This type of spending doesn’t immediately appear in the profit & loss statement but has a major cash impact.
📌 2️⃣ Negative Working Capital
• Some cash was also used for working capital changes, meaning the company spent more cash than it collected from customers.
📌 3️⃣ Increased Borrowings to Fund the Shortfall
• Instead of generating cash, Company A had to take on more debt to stay liquid.
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📊 Key Takeaways
✔ Net profit alone doesn’t tell the full story. Despite reporting strong profits, Company A was actually spending more cash than it made.
✔ Investment spending can hide cashflow issues. While long-term investments can be good, they can also strain liquidity.
✔ Companies with negative free cashflow need funding. Company A increased its debt, which could become a risk if cashflow doesn’t improve.
📌 This is why cashflow is more important than profit. A business can look profitable but still need outside financing to stay afloat.
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👉 Go to the Next Example
👉 Go to Lesson 2
📌 Year: 2024
📌 Currency: USD
⸻
🔹 High Profit, Negative Cashflow – What’s Happening?
On paper, company A looks highly profitable, reporting $170 million in net profit for 2024.
But a deeper look at its cashflow statement tells a different story:
💰 Net Profit: $170 million
💰 Free Cashflow: -$298 million
Instead of generating cash, company A actually burned $298 million in 2024.
⸻
🔎 Why is Cashflow Negative Despite High Profit?
📌 1️⃣ Large Investment Spending
• Company A spent heavily on investments, likely in renewable energy projects.
• This type of spending doesn’t immediately appear in the profit & loss statement but has a major cash impact.
📌 2️⃣ Negative Working Capital
• Some cash was also used for working capital changes, meaning the company spent more cash than it collected from customers.
📌 3️⃣ Increased Borrowings to Fund the Shortfall
• Instead of generating cash, Company A had to take on more debt to stay liquid.
⸻
📊 Key Takeaways
✔ Net profit alone doesn’t tell the full story. Despite reporting strong profits, Company A was actually spending more cash than it made.
✔ Investment spending can hide cashflow issues. While long-term investments can be good, they can also strain liquidity.
✔ Companies with negative free cashflow need funding. Company A increased its debt, which could become a risk if cashflow doesn’t improve.
📌 This is why cashflow is more important than profit. A business can look profitable but still need outside financing to stay afloat.
⸻
👉 Go to the Next Example
👉 Go to Lesson 2