Net Profit vs Cash Flow from operations (CFO) - What is more important?
A short thread with examples
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1. Net profit is recorded on an accrual basis whereas CFO deals with only cash items. Income earned is recorded in the net profit even if cash is not received
2. Since the net profit is recorded on an accrual basis it's a bit easy to manipulate net profit as compared to CFO.
Case 1: AMI Organics
If we check in the case of AMI organics, in FY22 its CFO was negative even though net profit was positive. It was because its changes in working capital were greater than net profit in FY22.
Similarly if we check in the case of Healthcare Global (HCG), its CFO has always been greater than its net profit. This is because HCG is a speciality hospital chain and in hospitals the depreciation costs are so high that the company looks loss making
1. Suppose if a company is outsourcing its manufacturing vs a company is manufacturing the products in-house. The company which is outsourcing has no plant and equipment so it will record high net profit since its depreciation costs
2. Also in some industries such as hospitals, the depreciation costs are so high that the company looks loss making but if
3. So rather than only looking at the net profit it is very important to check how much cash the company is generating through its core operations.
