1/

Get a cup of coffee.

In this thread, I'll walk you through the key differences between *earnings* and *cash flows*.

The punch line: Just because a company reports $1 of *earnings*, it does NOT mean the company has $1 more *cash* to distribute to owners.

2/

Before we look at a company's *earnings*, it's useful to understand the concept of Net Worth.

Net Worth (also called Book Value, or Shareholder's Equity) is simply the difference between what a company *owns* (ie, its assets) and what it *owes* (ie, its liabilities).

3/

Companies typically *own* a bunch of assets.

These include cash, "accounts receivable" (ie, money owed to the company by customers), "inventory" (ie, raw materials and finished products), "property, plant, and equipment" (ie, land, buildings, and factories), etc.

4/

Also, companies typically *owe* money or services to others (liabilities).

These include "accounts payable" (money owed to suppliers), "wages payable" (ie, money owed to employees for work they've already done), debt taken out by the company that has to be repaid, etc.

5/

Net Worth is what remains after we net out what a company *owns* against what it *owes*.

Companies that *own* more than they *owe* have positive net worth.

Companies that *owe* more than they *own* have negative net worth.