Module 3: Cash Flow, Capex, Working Capital & Capital Allocation

What are the three sections of a cash flow statement?

Operating, investing, and financing activities.

What does operating cash flow tell me?

How much cash the company generates or uses in its regular operations.

Where do I find cash generated from operations?

On the cash flow statement, usually called “net cash provided by operating activities.”

Why can net income differ from operating cash flow?

Accounting records sales and costs before cash moves. Noncash expenses and working capital also matter.

Can a profitable company have negative operating cash flow?

Yes. For example, it may sell on credit or build inventory faster than it collects cash.

Why is depreciation added back to net income in cash flow?

It lowered accounting profit, but no cash was paid for depreciation that period.

Why can EBITDA be positive while operating cash flow is negative?

Cash interest, taxes, or working-capital needs can use more cash than the business generates.

A company records a $10M sale on credit. Did it collect $10M?

Not yet. It earned the revenue, but the customer still owes the money.

A customer pays an old invoice. Is that new revenue?

No. The sale was recorded earlier; the payment brings in cash now.

Operating cash flow rose from $40M to $55M. How much?

$15 million, or 37.5% year over year.

Is higher operating cash flow automatically sustainable?

No. It could reflect a temporary cash collection or delayed payments to suppliers.

Operating cash flow is positive, but cash fell. How is that possible?

Capex, acquisitions, debt repayment, or buybacks may have used more cash than operations generated.

What is capital expenditure, or capex?

Cash spent on long-term assets like equipment, property, or certain software.

Where would I usually find capex?

In investing cash flows, often listed as purchases of property, plant, and equipment.

The statement has no line called “capex.” What do I look for?

PP&E purchases and other relevant long-term asset spending; I would check the footnotes.

What is the difference between capex and depreciation?

Capex is cash spent on assets; depreciation spreads an asset’s cost across its useful life.

A company buys $20M of equipment in cash. Is that all an immediate expense?

No. It is generally capitalized, then expensed gradually through depreciation.

How do I calculate simple free cash flow?

Operating cash flow minus capital expenditures.

Operating cash flow is $70M and capex $25M. What is FCF?

$45 million: $70 million minus $25 million.

Operating cash flow is $30M and capex $45M. What is FCF?

Negative $15 million. Capital spending exceeds operating cash generation.

Why does free cash flow matter to bondholders?

It shows cash left after operating needs and capex that may help reduce debt or build liquidity.

Can I calculate exact free cash flow from EBITDA alone?

No. I also need cash interest, taxes, working capital, capex, and other adjustments.

If capex is missing, can I calculate reported CFO-minus-capex FCF?

No. I can explain the missing input or make a clearly labeled estimate.

Does simple free cash flow include a company acquisition?

No. Acquisitions are usually shown separately in investing cash flows.

Does U.S. GAAP operating cash flow generally include cash interest?

Yes. So I would not subtract cash interest again from CFO-minus-capex FCF.

What are accounts receivable?

Money customers owe for sales the company has already recorded.

If accounts receivable increase, what usually happens to cash flow?

Cash flow falls, all else equal, because some sales have not been collected.

If inventory increases, what usually happens to cash flow?

Cash is tied up in more inventory, reducing operating cash flow, all else equal.

If accounts payable increase, what usually happens to cash flow?

Operating cash flow rises, all else equal, because suppliers have not yet been paid.

What is working capital in simple terms?

Money tied up in day-to-day operations, such as receivables and inventory, offset by supplier credit.

What is a simple operating working-capital formula?

Accounts receivable + inventory − accounts payable. Other operating items may also matter.

Receivables rise $20M and payables rise $5M. Cash flow effect?

Negative $15 million, assuming no other changes.

What happens to operating cash flow if customers pay faster?

It generally improves because receivables turn into cash sooner.

Can a fast-growing business use more cash even as profits rise?

Yes. More sales may require inventory and receivables before customers pay.

Operating cash flow rose because payables increased. Is that recurring?

Not necessarily. Delaying supplier payments can boost cash temporarily.

Receivables decline sharply. Does that always mean business improved?

No. It may reflect better collections or simply fewer sales. I would check both.

Why do credit analysts care about working capital?

It affects how much actual cash is available to fund operations, capex, and debt service.

What is maintenance capex?

Spending needed to keep existing operations and assets working.

What is growth capex?

Spending intended to expand capacity or support additional business.

Why is maintenance capex especially important in credit?

It may be hard to cut without hurting operations, so it reduces sustainable cash available for debt.

Is depreciation always a good estimate of maintenance capex?

No. Replacement costs, asset age, and accounting lives can differ from actual cash needs.

Capex fell from $100M to $50M. Which number is normal?

I cannot tell yet. I would ask what was growth versus maintenance spending and why it changed.

FCF rose because capex dropped. Is that automatically good?

It helps cash today, but lower spending may be temporary or delay needed maintenance.

Cash flow improved from collecting old receivables. What is the risk?

That cash benefit may not repeat; I would focus on normal cash generation.

What does capital allocation mean?

How management uses cash: reinvestment, acquisitions, debt repayment, dividends, or buybacks.

Where is cash spent acquiring another business usually reported?

Investing cash flows, generally separate from ordinary equipment capex.

Where does repayment of loan principal usually appear?

Financing cash flows. It uses cash but is not an operating expense.

Why might buybacks concern bondholders when cash flow is weak?

They use cash that could support liquidity or repay debt.

Cash rises because the company borrowed more. Did operations improve?

Not necessarily. Borrowing is financing cash flow, not operating cash generation.

Before trusting one year’s free cash flow, what would I check?

Normal operating cash flow, working-capital timing, maintenance capex, and one-time items.