02.5 · The cash-flow statement¶
Why this matters: profit rests on dozens of estimates; cash does not. The cash-flow statement tells you whether reported profit is turning into money, what the company is spending that money on, and who is funding the gap. Over FY21–FY26 Kaveri Pumps reported ₹416.9 Cr of profit and generated negative free cash flow — you can only see that here.
Learning objectives — after this lesson you can:
- Define operating, investing and financing cash flows and classify any cash flow correctly under Ind AS 7, including the interest and dividend rules that differ from IFRS and US GAAP.
- Walk Kaveri's FY26 operating cash flow from profit before tax, explaining the logic and sign of every adjustment.
- Build a direct-method operating cash flow from an income statement and two balance sheets.
- Compute FCF, lease-adjusted FCF, FCFF, FCFE and owner earnings for Kaveri FY26 and explain why they differ.
- Explain how Ind AS 116 moved lease payments out of operating cash flow, and undo it.
- Read the pattern of signs across CFO, CFI and CFF as a life-cycle signal, and state its limits.
Prerequisites: 02.3 The income statement, line by line, 02.4 The balance sheet, line by line · Time: ~100 min
1. Why the cash-flow statement exists¶
Accrual accounting (02.2) is the right way to measure performance — it matches revenue to the period in which it is earned and costs to the revenue they produce — but it runs on judgement: when a solar-pump installation counts as "delivered", how much of a receivable will never be collected, how long a machine will last, which costs can be capitalised. An old accountants' adage puts it bluntly: profit is an opinion, cash is a fact. The cash-flow statement (CFS) strips out the opinions and shows the actual movement of cash and cash equivalents during the period, sorted into three buckets:
- Cash flow from operating activities (CFO) — cash generated by the business itself.
- Cash flow from investing activities (CFI) — cash spent on, or received from, long-term assets and investments.
- Cash flow from financing activities (CFF) — cash exchanged with the providers of capital: lenders and shareholders.
(Cash is not entirely beyond manipulation — Satyam's fictitious bank balances are the classic Indian counter-example, covered in case I1 — but faking cash requires outright fraud, while flattering profit usually requires only optimism.)
Worked example 1 — Kaveri's six-year cash story
From the Kaveri running example (₹ Cr):
| ₹ Cr | FY21 | FY22 | FY23 | FY24 | FY25 | FY26 | Total |
|---|---|---|---|---|---|---|---|
| Profit after tax (PAT) | 32.8 | 47.2 | 62.6 | 86.4 | 97.4 | 90.5 | 416.9 |
| Cash flow from operations (CFO) | 50.8 | 65.7 | 66.6 | 86.6 | 60.9 | 65.1 | 395.7 |
| Capex (PP&E + intangibles) | (18.0) | (34.0) | (103.0) | (151.0) | (58.0) | (52.0) | (416.0) |
| Free cash flow (CFO − capex) | 32.8 | 31.7 | (36.4) | (64.4) | 2.9 | 13.1 | (20.3) |
| Dividends paid | (9.0) | (9.0) | (12.0) | (15.0) | (21.0) | (24.0) | (90.0) |
Over six years CFO was 395.7 / 416.9 = 95% of PAT — respectable. But capex (including ~₹190 Cr for the Hosur plant) absorbed all of it, so cumulative free cash flow was −₹20.3 Cr, while the company paid ₹90.0 Cr in dividends. Where did the money come from? Add up the remaining cash lines over six years:
| Six-year bridge | ₹ Cr |
|---|---|
| Free cash flow | (20.3) |
| Dividends paid | (90.0) |
| Interest paid on borrowings | (61.0) |
| Lease payments | (30.1) |
| Treasury income received | 33.9 |
| Proceeds from land sale (FY25) | 18.0 |
| Net cash shortfall = increase in net debt | (149.5) |
Net debt went from −₹9.0 Cr (net cash: borrowings 65.0 less cash 34.0 and liquid funds 40.0 at 31-Mar-2020) to +₹140.5 Cr at 31-Mar-2026: a swing of exactly ₹149.5 Cr. A P&L reader sees six years of profit, EPS nearly tripling (₹5.5 → ₹15.1) and a rising dividend. A cash-flow reader sees a company that has borrowed to pay its dividends. Neither view is wrong; you need both.
The CFS is also a legal requirement. Under Section 2(40) of the Companies Act, 2013, "financial statements" include a cash-flow statement, except for one-person companies, small companies and dormant companies (start-ups have a separate exemption) (CAIRR, s.2(40), verified Sep-2026). Listed companies must also publish a half-yearly cash-flow statement with their results (SEBI LODR Reg 33(3)(g), verified Sep-2026).
2. The three sections and what goes where¶
Ind AS 7 (Statement of Cash Flows) defines the buckets:
- Operating activities — the principal revenue-producing activities of the entity, and anything that is not investing or financing.
- Investing activities — acquiring and disposing of long-term assets and other investments not included in cash equivalents.
- Financing activities — activities that change the size and composition of the entity's equity and borrowings.
Cash and cash equivalents are cash, demand deposits, and short-term, highly liquid investments that are readily convertible to known amounts of cash with an insignificant risk of value change — in practice, deposits with an original maturity of three months or less. Bank overdrafts repayable on demand can be netted into cash equivalents when they form an integral part of cash management, so check the reconciliation note: a company can show "cash" that is really net of an overdraft.
Here is where the common items go for a non-financial company reporting under Ind AS:
| Cash flow | Section | Note |
|---|---|---|
| Receipts from customers, payments to suppliers and employees | CFO | The core |
| Income taxes paid | CFO | Unless specifically identifiable with an investing/financing item |
| Short-term, low-value and variable lease payments | CFO | Ind AS 116 exemptions |
| Purchase / sale of PP&E and intangibles (capex) | CFI | Includes advances paid for capex |
| Purchase / sale of investments (other than cash equivalents) | CFI | Liquid-fund churn lives here |
| Acquisition of a subsidiary, net of cash acquired | CFI | |
| Loans given to (and repaid by) subsidiaries or others | CFI | For a non-lender |
| Interest received, dividends received | CFI | Mandatory under Ind AS 7 for non-financial entities |
| Proceeds from / repayment of borrowings | CFF | Term loans, NCDs, working-capital loans |
| Interest paid | CFF | Mandatory under Ind AS 7 for non-financial entities |
| Lease payments — principal and interest | CFF | Ind AS 116 + Ind AS 7 |
| Dividends paid, share issues, buybacks | CFF |
Non-cash transactions are excluded. If a company acquires an asset by issuing shares, converts debt into equity, buys a machine on credit or signs a new lease, no cash moves, so the transaction does not appear in the three sections; it is disclosed elsewhere. The scale can be enormous. When Hindustan Unilever merged GlaxoSmithKline Consumer Healthcare into itself on 1-Apr-2020, it paid ₹40,242 Cr — in HUL shares. In HUL's FY21 standalone CFS (Integrated Annual Report 2020-21) the merger itself shows up only as a separate line adding ₹300 Cr of "cash acquired under business combination" to the cash reconciliation (plus small cash costs such as ₹44 Cr of stamp duty on the share issue). By contrast, the Horlicks brand rights HUL bought for cash (₹3,045 Cr + ₹91 Cr costs) and the VWash brand (₹286 Cr) together make up the ₹3,422 Cr "purchase of intangible assets" in CFI. An acquirer that pays in shares can look capex-light in its cash-flow statement. Always read the acquisitions note.
Gross versus net. Ind AS 7 generally wants gross receipts and payments, but allows netting for items with quick turnover. HUL reports purchases of current investments of ₹38,450 Cr and sales of ₹37,076 Cr in FY21 — treasury churn that nets to −₹1,374 Cr. Net such churn yourself before reading CFI as "investment".
3. The indirect method, line by line — Kaveri FY26¶
Almost every Indian company presents CFO using the indirect method: start from profit and adjust it to cash. The logic is four steps:
- Start from profit before tax (Indian practice under Ind AS 7).
- Add back non-cash expenses and remove non-cash income (depreciation, ESOP charges, provisions, unrealised FX or fair-value gains).
- Remove items that belong in another section (finance costs go to CFF; interest income and gains on asset sales go to CFI).
- Adjust for working-capital changes, then deduct taxes actually paid.
The working-capital rule is the only part that needs thought. An increase in an operating asset uses cash — if receivables rose ₹77.0 Cr, then ₹77.0 Cr of this year's revenue was booked but not collected. An increase in an operating liability provides cash — if payables rose ₹11.1 Cr, suppliers financed ₹11.1 Cr of this year's costs.
| Kaveri FY26, ₹ Cr | Amount | Why it is there |
|---|---|---|
| Profit before tax | 121.0 | Starting point |
| Add: depreciation & amortisation | 47.8 | Non-cash: PP&E 39.6 + ROU 4.7 + intangibles 3.5. The cash left when the assets were bought (CFI in earlier years) |
| Add: finance costs | 17.0 | Deducted in PBT, but interest paid belongs in CFF (borrowings 15.6 + lease interest 1.4) |
| Less: interest / treasury income | (3.9) | Included in PBT, but interest received belongs in CFI |
| Less: gain on sale of land | 0.0 | None in FY26 (in FY25, the ₹14.0 Cr gain was removed here; the ₹18.0 Cr proceeds went to CFI) |
| Add: share-based payment expense | 2.4 | Non-cash: charged in employee cost, credited to equity |
| Operating profit before working-capital changes | 184.3 | |
| (Increase) in inventories | (26.8) | 161.3 → 188.1 |
| (Increase) in trade receivables | (77.0) | 269.7 → 346.7 — the big one |
| (Increase) in other current assets | (4.3) | 35.2 → 39.5 |
| Increase in trade payables | 11.1 | 132.3 → 143.4 |
| Increase in other current liabilities | 7.3 | 58.6 → 65.9 |
| Working-capital change | (89.7) | |
| Income taxes paid | (29.5) | Current tax; no tax payable/receivable balance moved. Deferred tax (1.0) was never cash |
| Cash flow from operations (CFO) | 65.1 |
Three cross-checks make this table stick.
- Operating profit before working-capital changes = EBITDA + non-cash items, when there are no exceptional items: 181.9 + 2.4 = 184.3 ✓. In FY25, PBT 130.2 + D&A 44.3 + finance costs 16.3 − treasury income 4.5 − land gain 14.0 + ESOP 2.0 = 174.3, and EBITDA 172.3 + ESOP 2.0 = 174.3 ✓. The indirect method is really "EBITDA, adjusted".
- Every working-capital line is a balance-sheet difference — which is why you can rebuild CFO from two balance sheets (02.6 does exactly that).
- Conversion ratios. CFO/EBITDA = 65.1 / 181.9 = 35.8%; CFO/PAT = 65.1 / 90.5 = 71.9%. For a manufacturer, CFO persistently below ~75% of PAT means profits are being reinvested in working capital, or are not real. Kaveri's receivables line alone absorbed 42% of EBITDA (77.0 / 181.9).
Real reconciliations are busier. HUL's FY21 standalone statement adjusts PBT for, among others, depreciation, profit on sale of PP&E, government grants accrued, contingent-consideration true-ups, finance income, dividend income, fair-value gains on investments, interest expense, ESOP charges, inventory write-offs, bad debts written off and derivative mark-to-market. The principle is identical: remove every non-cash item and every item that belongs in CFI or CFF. Two are worth a second look whenever they appear — provisions for doubtful debts and inventory write-downs (added back: they were charged but no cash left) and unrealised gains (deducted: they were booked but no cash arrived).
Trader's lens
Accrual profit is mark-to-market P&L; CFO is settled cash. A desk can print MTM profits while bleeding cash to variation margin, and a growing business is in the same position: to keep trading it must post collateral — inventory on the shelf and credit extended to customers. Kaveri's solar receivables are collateral lodged with a slow clearing house (two state nodal agencies). The P&L books the trade at inception; the CFS tells you when, or whether, it settles.
4. The direct method¶
The direct method reports gross cash receipts and payments by type — "cash received from customers", "cash paid to suppliers", and so on. Ind AS 7 (paragraph 19) encourages it because it is more informative (Ind AS 7 text via CAIRR, verified Sep-2026), yet almost no Indian company uses it. You can build it yourself from the P&L and two balance sheets — a useful discipline because it forces you to see each flow.
Worked example 2 — Kaveri FY26 CFO by the direct method
| Line | Construction | ₹ Cr |
|---|---|---|
| Cash received from customers | Revenue 1,318.0 − increase in receivables 77.0 | 1,241.0 |
| Cash paid for materials | Material cost 858.0 + increase in inventory 26.8 = purchases 884.8; less increase in payables 11.1 | (873.7) |
| Cash paid to employees | Employee cost 117.3 − non-cash ESOP 2.4 | (114.9) |
| Cash paid for other expenses | Other expenses 160.8 (assumed cash) | (160.8) |
| Net change in other current assets/liabilities | −4.3 + 7.3 | 3.0 |
| Income taxes paid | (29.5) | |
| Cash flow from operations | 65.1 |
Same answer as the indirect method, as it must be. But the direct view says something the indirect view hides: Kaveri collected 1,241.0 / 1,318.0 = 94.2% of what it billed in FY26, and the ₹77.0 Cr it did not collect is larger than the profit it retained after dividends (90.5 − 24.0 = ₹66.5 Cr). (The allocation of "other current assets and liabilities" between suppliers and employees is an assumption; when you build a direct CFS from outside, state such allocations.)
5. Investing and financing — Kaveri FY26¶
Investing (CFI). Capex on PP&E including CWIP ₹48.0 Cr, purchase of intangibles ₹4.0 Cr, net sale of liquid mutual funds ₹15.0 Cr, and treasury income received ₹3.9 Cr:
Separate core CFI (capex and acquisitions: −₹52.0 Cr) from treasury CFI (buying and selling liquid funds, interest received: +₹18.9 Cr). Selling treasury investments is not "disinvestment"; it is moving money from one pocket to another — here, to fund working capital.
Financing (CFF). Term-loan repayment ₹20.0 Cr, net working-capital borrowing +₹38.0 Cr, interest paid on borrowings ₹15.6 Cr, lease payments (principal + interest) ₹5.9 Cr, dividends ₹24.0 Cr:
Total: 65.1 − 33.1 − 27.5 = +4.5, taking cash from ₹28.0 Cr to ₹32.5 Cr — matching the balance sheet.
Ind AS 7 (paragraphs 44A–44E) also asks for a reconciliation of liabilities arising from financing activities, separating cash from non-cash movements. For Kaveri it would look like this:
| ₹ Cr | Opening | Cash flows | New leases (non-cash) | Interest accrued | Closing |
|---|---|---|---|---|---|
| Borrowings (non-current + current) | 170.0 | 18.0 | – | – | 188.0 |
| Lease liabilities | 16.7 | (5.9) | 6.0 | 1.4 | 18.2 |
The ₹6.0 Cr of new leases is a debt-like liability that never passed through CFF. Across a lease-heavy retailer or a company that assumes debt in acquisitions, this reconciliation is where hidden increases in leverage show up.
6. Classification rules — and how they change CFO¶
This is the part of cash-flow analysis that most analysts get wrong when comparing across countries.
Ind AS 7 (India). For entities other than financial institutions, Ind AS 7 requires interest paid to be classified as financing and interest and dividends received as investing; dividends paid are financing. This is an Indian carve-out: IAS 7 offers a choice, Ind AS 7 does not (Ind AS 7 paragraphs 31–34 and appendix, via CAIRR, verified Sep-2026). For financial institutions, interest paid and received are operating. (The Kaveri reference page describes its classification as a presentation choice; strictly, for an Indian non-financial company it is the rule.)
IFRS (IAS 7) today. A company may classify interest paid as operating or financing, and interest and dividends received as operating or investing. Many IFRS reporters put interest paid in CFO.
US GAAP (ASC 230). Interest paid, interest received and dividends received are operating; dividends paid are financing. Under ASC 842, payments on operating leases are also operating cash flows — only finance-lease principal goes to financing.
IFRS 18 from 2027. IFRS 18 (issued April 2024) amends IAS 7 for periods beginning on or after 1-Jan-2027: the indirect method will start from a new operating profit subtotal, and for a company whose main business is not lending or investing, interest paid and dividends paid go to financing while interest and dividends received go to investing (IFRS Foundation, IAS 7 page; KPMG; verified Sep-2026). In other words, IFRS is moving to what Ind AS already requires. India's equivalent, Ind AS 118, was recommended by NFRA in December 2025 with a proposed effective date of financial years beginning on or after 1-Apr-2027 (FY28); as of Sep-2026 we could not confirm that the MCA has notified it (Uniqus summary of NFRA deliberations). Check the MCA's Ind AS notifications before FY28 results arrive. (The MCA did notify smaller amendments to Ind AS 7 and other standards on 12-Aug-2026, effective from FY27 — KPMG India.)
Worked example 3 — one company, three CFOs
Take Kaveri's FY26 cash flows and re-present them under other rule-books (illustrative; the US case assumes all of Kaveri's leases would be operating leases under ASC 842):
| ₹ Cr | Ind AS (as reported) | IFRS, "interest in CFO" policy | US GAAP |
|---|---|---|---|
| CFO as reported | 65.1 | 65.1 | 65.1 |
| Interest paid on borrowings | – | (15.6) | (15.6) |
| Lease interest | – | (1.4) | – |
| Operating lease payments (principal + interest) | – | – | (5.9) |
| Interest received | – | 3.9 | 3.9 |
| CFO | 65.1 | 52.0 | 47.5 |
| CFO / EBITDA | 35.8% | 28.6% | 27.0%* |
*US GAAP EBITDA would also be lower, ≈181.9 − 5.9 = ₹176.0 Cr, because the operating-lease cost sits in operating expenses.
The same cash, the same business: CFO ranges from ₹47.5 Cr to ₹65.1 Cr, a 37% gap. When you compare an Indian company's CFO or "cash conversion" with a US or European peer, restate one of them first. The cleanest comparator is a free-cash-flow measure that deducts interest and lease payments explicitly (§8).
Lenders are different. For a bank or NBFC, lending is the operating activity, so loans disbursed and repaid, interest received and interest paid all sit in CFO. A growing lender therefore reports large negative CFO, funded by borrowings in CFF. Nirmal Finance's gross loans grew ₹1,140.0 Cr in FY26 (5,780.0 → 6,920.0) against PAT of ₹239.5 Cr, while its borrowings rose ₹966.6 Cr (4,598.8 → 5,565.4); its CFO is necessarily deeply negative, and that is healthy growth, not distress. CFO/PAT is meaningless for lenders — 07.1 uses asset-quality and capital ratios instead.
7. Leases: how Ind AS 116 moved cash out of CFO¶
Before FY20, under Ind AS 17, rent on an operating lease was an operating expense and an operating cash outflow. Ind AS 116 (applicable from 1-Apr-2019) puts the lease on the balance sheet (ROU asset + lease liability; see 02.4), and the cash payments are now split: the principal portion goes to financing, and the interest portion follows the company's interest-paid classification — which in India means financing too. Only short-term, low-value and variable lease payments stay in CFO.
Consequences:
- CFO rose mechanically for lease-heavy businesses (retail, quick-service restaurants, airlines, hospitals) with no change in economics. So did EBITDA (02.7).
- "CFO − capex" overstates free cash flow unless you also deduct lease payments. Rent is as unavoidable as wages.
- Kaveri: under the old rules its FY26 CFO would have been ≈65.1 − 5.9 = ₹59.2 Cr (assuming all its leases would have been operating leases). HUL FY21: ₹383 Cr of lease principal and ₹81 Cr of lease interest sit in CFF — ₹464 Cr that a pre-2019 statement would have shown in CFO.
The fix is simple and worth making a habit: lease-adjusted FCF = CFO − capex − lease payments.
8. Free cash flow — five definitions, one company¶
"Free cash flow" is not defined by any accounting standard, so every analyst, broker and company defines it differently. Know the five you will meet, and always state which one you mean.
| Measure | Formula | Kaveri FY26, ₹ Cr | Use it for |
|---|---|---|---|
| FCF (simple) | CFO − capex (PP&E + intangibles) | 65.1 − 52.0 = 13.1 | Quick screen; the course's ratio table uses this |
| Lease-adjusted FCF | FCF − lease payments | 13.1 − 5.9 = 7.2 | Comparing across the Ind AS 116 break or with lease-heavy peers |
| FCFF (free cash flow to the firm) | EBIT × (1 − t) + D&A − capex − ΔNWC | 100.3 + 47.8 − 52.0 − 89.7 = 6.4 | DCF at WACC (06.3) |
| FCFE (free cash flow to equity) | CFO − capex + interest received − interest paid − lease payments + net borrowing | 65.1 − 52.0 + 3.9 − 15.6 − 5.9 + 18.0 = 13.5 | Dividend capacity; valuing lenders and equity directly |
| Owner earnings (Buffett) | PAT + D&A + other non-cash charges − maintenance capex (− WC needed to maintain volume) | ≈91.7 (before growth working capital; see below) | Judging a business's steady-state cash power |
Some explanations.
FCFF is the cash available to all capital providers before any financing flows, computed as if the company had no debt: tax is charged on EBIT at the statutory rate (NOPAT = 134.1 × (1 − 25.17%) = ₹100.3 Cr), D&A is added back, and capex and the investment in working capital (ΔNWC: 365.0 − 275.3 = ₹89.7 Cr) are deducted. It is lower than simple FCF (6.4 vs 13.1) for three reasons, which together explain the ≈₹6.7 Cr gap (small rounding difference):
- ESOP expense (₹2.4 Cr) is added back in CFO but is a real cost of paying employees; FCFF does not add it back.
- Interest tax shield (≈₹3.3 Cr). Actual taxes paid are lower because interest is deductible (net of tax on treasury income: 25.17% × (17.0 − 3.9) = 3.3). In a DCF the shield is captured in the after-tax cost of debt inside WACC, so FCFF must not count it again.
- Deferred tax (₹1.0 Cr). CFO deducts only current tax; NOPAT charges the full statutory rate.
One consistency rule links FCFF to the equity bridge. The reference valuation treats lease liabilities as debt (it deducts ₹18.2 Cr from enterprise value), so lease payments are financing flows and are not deducted in FCFF. Strictly, new right-of-use assets (₹6.0 Cr in FY26) are then a form of capex; for Kaveri the amount is small, but for a retailer or airline the choice — leases as debt, or rent as an operating cost — must be made once and applied consistently on both sides of the valuation.
FCFE starts from cash actually available to shareholders after lenders have been paid and after new borrowing. Kaveri's FY26 FCFE of ₹13.5 Cr compares with dividends of ₹24.0 Cr. The gap was funded by selling ₹15.0 Cr of liquid funds: 13.5 + 15.0 − 24.0 = 4.5 = the increase in cash ✓. And note that FCFE was positive only because of ₹18.0 Cr of net new borrowing — without it, FCFE would have been −₹4.5 Cr.
Owner earnings comes from the appendix to Warren Buffett's 1986 letter to Berkshire Hathaway shareholders: reported earnings, plus depreciation, amortisation and certain other non-cash charges, less the average annual capital expenditure needed to maintain the business's competitive position and unit volume — and less any extra working capital needed for the same purpose. For Kaveri FY26:
Here the maintenance-capex proxy is depreciation on PP&E (₹39.6 Cr) plus amortisation of intangibles (₹3.5 Cr), and lease principal stands in for "maintaining" the leased assets whose ROU amortisation was added back inside D&A. ESOP expense is deliberately not added back. That ₹91.7 Cr is the steady-state cash power if depreciation is a fair proxy for maintenance capex — management's FY27 capex guidance of ₹45–50 Cr "maintenance + automation" is consistent with that — and if the ₹89.7 Cr jump in working capital is growth or a temporary collection problem rather than a permanent cost of staying in the solar business. That last "if" is the whole Kaveri debate. 04.4 teaches the methods for estimating maintenance capex.
The spread — from ₹6.4 Cr to ₹91.7 Cr for the same company in the same year — is not a flaw. Each number answers a different question. The mistake is to quote one without saying which.
9. Reading the pattern of signs¶
Because each of CFO, CFI and CFF can be positive or negative, there are 2³ = 8 sign patterns. Victoria Dickinson ("Cash Flow Patterns as a Proxy for Firm Life Cycle", The Accounting Review, 2011; SSRN) maps them to five life-cycle stages:
| Stage | Pattern(s): CFO, CFI, CFF | Intuition |
|---|---|---|
| Introduction | (−, −, +) | Burning cash, investing, raising money |
| Growth | (+, −, +) | Profitable, investing more than it earns, raising money |
| Maturity | (+, −, −) | Self-funding capex and returning cash to capital providers |
| Shake-out | (−, −, −), (+, +, +), (+, +, −) | Transitional, mixed signals |
| Decline | (−, +, +), (−, +, −) | Operations consume cash; selling assets to survive |
Kaveri's pattern:
| FY21 | FY22 | FY23 | FY24 | FY25 | FY26 | |
|---|---|---|---|---|---|---|
| CFO / CFI / CFF | + − − | + − − | + − + | + − + | + − − | + − − |
| Stage | Mature | Mature | Growth | Growth | Mature | Mature |
| Core CFI (capex net of asset sales), ₹ Cr | (18.0) | (34.0) | (103.0) | (151.0) | (40.0) | (52.0) |
The signs capture the Hosur build-out (FY23–FY24: borrow and invest) and a return to "maturity" afterwards. HUL's FY21 standalone statement (CFO +8,957, CFI −1,367, CFF −9,280, ₹ Cr) is textbook maturity — dividends of ₹8,811 Cr consumed almost the entire CFO.
But look at what the signs miss for Kaveri FY25–FY26: CFF is negative because term loans were repaid and dividends paid, yet working-capital borrowings rose ₹66.0 Cr over the two years (28.0 + 38.0) and net debt climbed. A "mature" label on a company that is borrowing short-term to fund receivables is misleading. Limits to keep in mind:
- Treasury flows flip signs. Kaveri's FY21 CFI was only −₹3.0 Cr because it sold ₹10.0 Cr of liquid funds; core CFI was −₹18.0 Cr. Use core CFI.
- One year is noise. Use two-to-three-year sums.
- Composition matters more than sign. Negative CFF made of debt repayment is different from negative CFF made of dividends funded by new short-term debt.
- Lenders do not fit (§6).
10. A ten-minute routine for reading any cash-flow statement¶
- CFO vs PAT and EBITDA over three to five years, cumulatively. Persistent CFO/PAT below ~75% needs an explanation (04.7).
- Which working-capital line is eating cash? Receivables, inventory or a fall in payables each tell a different story.
- Taxes paid vs current tax in the P&L. Large, persistent gaps deserve a look at the tax note.
- Capex vs depreciation. Capex well above D&A means growth (or gold-plating); well below means harvesting.
- Scan CFI for things that are not capex: acquisitions, investments in and loans to group companies, inter-corporate deposits (09.4).
- Net off treasury churn in CFI and look at interest received relative to average cash (the Satyam test).
- Who is funding the gap? In CFF, compare dividends and buybacks with FCF; look for borrowing to pay dividends.
- Interest paid vs finance costs. Interest paid well above the P&L charge can mean interest is being capitalised into CWIP.
- Read the non-cash-transactions disclosure and the financing-liabilities reconciliation (leases, debt assumed in acquisitions, conversions).
- Standalone vs consolidated. Cash can be trapped in subsidiaries; loans to subsidiaries sit in the parent's CFI (02.8).
India notes
- Classification is mandated. Ind AS 7 requires non-financial companies to show interest paid and dividends paid in CFF and interest/dividends received in CFI; IFRS reporters may differ until IFRS 18 applies (2027).
- Half-yearly CFS. Listed companies publish a cash-flow statement with the Q2 and Q4 results (LODR Reg 33(3)(g)). For seasonal businesses like Kaveri (peak season Q4–Q1), H1 and H2 cash flows can look very different; compare H1 with the previous H1.
- Supplier finance. Ind AS 7 paragraphs 44F–44H, effective for periods beginning on or after 1-Apr-2025 (i.e. FY26 annual reports), require disclosure of supplier-finance arrangements — the terms, the liabilities involved and their payment-date ranges (Taxmann, verified Sep-2026). Read it: reverse factoring can make CFO look better by stretching payables through a bank.
- Legacy lines. Pre-FY21 statements show "dividend distribution tax paid" in CFF (HUL FY20: ₹1,048 Cr); the tax was abolished from 1-Apr-2020, so the line disappears — do not mistake that for a change in payout policy.
- Ind AS 118 would move the indirect method's starting point from PBT to operating profit — notified status pending as of Sep-2026 (see §6).
Common mistakes
- Calling "CFO − capex" FCF without adjusting for leases after FY20, or without saying whether capex includes intangibles and acquisitions.
- Comparing Indian CFO with a US or IFRS peer's CFO without moving interest (and operating-lease payments) to the same section.
- Reading sale of liquid funds as positive investing cash flow or "divestment". It is treasury management.
- Adding back ESOP expense and calling it cash. It is non-cash only because employees are paid in shares.
- Ignoring non-cash acquisitions and new leases. A share-funded acquisition or a big new lease increases the company's claims without touching CFI or CFF.
- Using a single year. Working capital is lumpy; judge conversion over three to five years.
- Applying CFO/PAT to banks and NBFCs, whose CFO is negative when they grow.
- Forgetting the working-capital sign rule: asset up → cash down; liability up → cash up.
Key terms¶
| Term | Meaning |
|---|---|
| Cash-flow statement (CFS) | Statement of cash inflows and outflows in a period, split into operating, investing and financing |
| CFO | Cash flow from operating activities — cash generated by the business |
| CFI | Cash flow from investing activities — capex, investments, acquisitions, (for non-lenders) interest/dividends received |
| CFF | Cash flow from financing activities — borrowings, repayments, interest paid, dividends, share issues, lease payments |
| Cash equivalents | Short-term, highly liquid investments with insignificant risk, typically ≤3-month original maturity |
| Indirect method | CFO derived by adjusting profit for non-cash items, reclassifications and working-capital changes |
| Direct method | CFO presented as gross receipts and payments |
| Operating profit before working-capital changes | PBT adjusted for non-cash and non-operating items; ≈ EBITDA + non-cash charges |
| Working-capital change | Cash absorbed (or released) by changes in inventories, receivables, payables and other operating items |
| Non-cash transaction | Investing or financing transaction with no cash movement (share-funded acquisition, new lease) |
| Core CFI | Capex and acquisitions, excluding treasury buying/selling of liquid investments |
| Free cash flow (FCF) | Commonly CFO − capex; always state the definition |
| Lease-adjusted FCF | FCF − lease payments; restores comparability after Ind AS 116 |
| FCFF | EBIT(1 − t) + D&A − capex − ΔNWC; cash available to all capital providers |
| FCFE | Cash available to shareholders after debt service and net borrowing |
| Owner earnings | Buffett's PAT + D&A and non-cash charges − maintenance capex (and maintenance WC) |
| NOPAT | Net operating profit after tax = EBIT × (1 − tax rate) |
| Interest tax shield | Tax saved because interest is deductible; captured in WACC, not in FCFF |
| Reconciliation of financing liabilities | Ind AS 7 para 44A disclosure of cash and non-cash changes in debt and leases |
| Supplier finance (reverse factoring) | A bank pays suppliers early and the buyer pays the bank later; disclosed under Ind AS 7 paras 44F–44H |
Check your understanding¶
- For each item, give the Ind AS 7 section for (i) Kaveri and (ii) Nirmal Finance: (a) interest paid on bank borrowings; (b) interest received; (c) a new loan given to a customer; (d) dividends paid to shareholders; (e) the principal portion of an office lease payment; (f) a three-month rental of a temporary warehouse.
Answer
(a) Kaveri: CFF (mandatory for non-financial entities under Ind AS 7). Nirmal: CFO (interest paid is operating for a financial institution). (b) Kaveri: CFI. Nirmal: CFO. (c) Kaveri: CFI (it is not in the lending business — and a loan to a customer would be unusual and worth questioning). Nirmal: CFO — lending is its operating activity. (d) Both: CFF. (e) Both: CFF (Ind AS 116 principal portion). (f) Both: CFO — a short-term lease (≤12 months) is exempt from Ind AS 116 recognition and its payments are operating.- Rebuild Kaveri's FY25 CFO using the indirect method. FY25 included a ₹14.0 Cr gain on selling land (book value ₹4.0 Cr, proceeds ₹18.0 Cr). Where do the ₹18.0 Cr of proceeds appear?
Answer
PBT 130.2 + D&A 44.3 + finance costs 16.3 − treasury income 4.5 − land gain 14.0 + ESOP 2.0 = 174.3. Working capital: inventories (30.7), receivables (76.8), other current assets (5.0), payables +22.6, other current liabilities +8.3 = (81.6). Taxes paid (31.8). CFO = 174.3 − 81.6 − 31.8 = ₹60.9 Cr ✓. The gain is deducted because it is not operating cash; the full ₹18.0 Cr proceeds appear in CFI as "proceeds from sale of land". (Strictly, tax attributable to the gain could be classified in CFI if specifically identifiable; Kaveri, like most companies, leaves all tax in CFO.)- Kaveri's CFO/PAT was 154.9% in FY21 and 62.5% in FY25. Using the reference data, explain the difference in two sentences.
Answer
In FY21 working capital absorbed only ₹11.3 Cr while D&A (₹26.5 Cr) was large relative to a small PAT (₹32.8 Cr), so cash exceeded profit. In FY25 working capital absorbed ₹81.6 Cr — ₹76.8 Cr of it receivables as solar sales to state agencies went uncollected — and PAT included a ₹14.0 Cr land gain whose cash sits in CFI, not CFO, so CFO (₹60.9 Cr) fell well short of PAT (₹97.4 Cr).- A fictional company reports EBITDA of ₹100 Cr. During the year receivables rose ₹40 Cr, inventory rose ₹10 Cr, payables rose ₹15 Cr; taxes paid ₹20 Cr; capex ₹30 Cr; lease payments ₹8 Cr; interest paid ₹6 Cr. It has no other items. Compute CFO under Ind AS, FCF and lease-adjusted FCF. Then compute CFO under US GAAP, assuming all leases are operating leases.
Answer
Ind AS CFO = 100 − 40 − 10 + 15 − 20 = ₹45 Cr (interest and lease payments are in CFF). FCF = 45 − 30 = ₹15 Cr. Lease-adjusted FCF = 15 − 8 = ₹7 Cr. US GAAP CFO = 45 − 6 (interest) − 8 (operating-lease payments) = ₹31 Cr — and US GAAP EBITDA would be about ₹92 Cr because the lease cost sits in operating expenses. Same cash, different labels.- Nirmal Finance grew gross loans by ₹1,140.0 Cr in FY26 and earned PAT of ₹239.5 Cr. Its CFO is deeply negative. Is this a red flag? What would be?
Answer
Not by itself: for a lender, loans disbursed are operating outflows, so balance-sheet growth mechanically produces negative CFO, funded by borrowings (Nirmal's rose ₹966.6 Cr) and retained profit. Red flags would be funding the growth with short-tenor liabilities against long-tenor loans (ALM mismatch), rising stage-3 loans or write-offs relative to the book, falling capital adequacy, or loan growth far above the franchise's historical underwriting capacity — the metrics of lesson 07.1 (Banks & NBFCs), not CFO/PAT.- Classify these sign patterns (CFO, CFI, CFF) using Dickinson's stages and say what else you would check: (a) +, −, − with CFF made mostly of new short-term borrowing offset by a large dividend; (b) −, +, −; (c) −, −, +.
Answer
(a) Formally "maturity", but a company borrowing short-term to pay dividends is not self-funding — check FCF vs dividends and the trend in net debt (Kaveri FY25–FY26 has a milder version of this). (b) "Decline": operations consume cash, assets are being sold and capital repaid — check whether asset sales are strategic or distress, and liquidity. (c) "Introduction": typical of a start-up or a company in a heavy build phase funded by new capital — check the path to positive CFO and how long the funding lasts.- HUL paid ₹40,242 Cr for GlaxoSmithKline Consumer Healthcare in FY21. Why does its FY21 CFI show only ₹3,422 Cr of intangible purchases, and what does this imply for comparing its capex intensity with a peer that buys brands for cash?
Answer
The merger was paid for in HUL shares — a non-cash transaction, excluded from CFI and CFF (only the ₹300 Cr of cash acquired appears, as a separate reconciling line). The ₹3,422 Cr is the cash paid for the Horlicks IPR (₹3,136 Cr including costs) and the VWash brand (₹286 Cr). A peer that buys brands for cash shows the full price in CFI, lowering its FCF; HUL's FCF looks higher even though it "spent" far more. Compare acquirers using total consideration (cash + shares) from the acquisitions note, not CFI alone.- Kaveri's FY26 FCFE was ₹13.5 Cr and it paid ₹24.0 Cr of dividends. Show how cash still rose ₹4.5 Cr, and state what FCFE would have been without new borrowing.
Answer
13.5 (FCFE) + 15.0 (net sale of liquid funds) − 24.0 (dividends) = +4.5, the increase in cash (28.0 → 32.5). FCFE already includes ₹18.0 Cr of net borrowing (−20.0 term loans + 38.0 working-capital loans); without it FCFE would have been 13.5 − 18.0 = −₹4.5 Cr. The dividend was funded by debt and treasury drawdown, not by free cash flow.Go deeper¶
- Ind AS 7, Statement of Cash Flows — the standard itself, including the carve-out on interest and dividends and the new supplier-finance paragraphs.
- Berkshire Hathaway 1986 shareholder letter — the appendix defines owner earnings and explains why "cash flow" figures that ignore maintenance capex mislead.
- Victoria Dickinson, "Cash Flow Patterns as a Proxy for Firm Life Cycle", The Accounting Review 86(6), 2011 (SSRN) — the life-cycle classification in §9.
- Howard Schilit, Jeremy Perler & Yoni Engelhart, Financial Shenanigans (4th ed., McGraw-Hill, 2018) — the "cash-flow shenanigans" chapters show how CFO is flattered; pairs with 09.4.
- KPMG — IFRS 18 changes the statement of cash flows — what changes globally from 2027 and why Indian readers already live in that world.
← Previous: 02.4 The balance sheet, line by line · Module index · Next: 02.6 How the three statements link →