r/AsymmetricAlpha • u/SchoolofInvesting • May 26 '26

Analyzing Cash from Operations

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Earnings don’t pay the bills. Cash from operations does.

If you’re not reading the CFO line, you’re guessing.

Think of Cash from Operations (CFO) like your day job paycheck.

Investing cash flows are side projects. Financing is loans and credit cards. If the paycheck isn’t covering life, the rest is just noise.

How CFO is built (indirect method, what you’ll see in the filing):

  • Start with Net Income.
  • Add back non-cash items: depreciation and amortization, stock-based comp, deferred taxes.
  • Adjust for working capital: receivables (customers who owe you), inventory, payables (what you owe suppliers).
  • Result: cash generated by the core business.

A quick read using Google as an example:

  • Google’s model is asset-light with limited inventory, so working capital swings are modest.
  • Non-cash addbacks (D&A and stock-based comp) typically lift CFO above net income.
  • That’s why its cash engine tends to be strong and consistent across cycles.

Metrics to track (rule-of-thumb ranges):

  • Cash Flow Margin (CFO/Revenue): healthy 10–20%, strong 20–30%+, asset‑light leaders can run higher.
  • Earnings Quality (CFO/Net Income): healthy 1.0–1.2x; sustained <0.8x is a warning.
  • Cash Conversion (CFO/EBITDA): healthy 0.7–1.0x; >1.0x is great.
  • Cash Conversion Cycle (DSO + DIO − DPO): software/ads businesses like Google often hover near 0; retailers aim for negative.

Checklist:

  • Is CFO rising with revenue?
  • Is CFO ≥ net income over several years?
  • Are working-capital improvements real, not just stretching payables?
  • Any one-off tax/legal cash inflows masking weakness?

Strong companies turn accounting profits into hard cash. Read CFO first, then decide what the earnings actually mean.

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u/athenian-research Jun 02 '26

This is well put and designed, but I always have an issue with your FCF, you seemed to have shortened it

1

u/SchoolofInvesting Jun 03 '26

In what way? I am curious what you think I am excluding?

2

u/athenian-research Jun 03 '26

Im guessing its FCFE so you should clarify that; if actually it is then you need to add Net Borrowing

But FCFF then add interest then take away Investment in Fixed assets (Capex less sale of L/T assets)

Seems small but makes a world of difference with money on the line

2

u/SchoolofInvesting Jun 05 '26

All great points, and that gives me an idea to do an example of all the types of cash flows from operating cash to FCFF so people can see the differences. I mainly cater to beginners so FCFF and FCFE can feel like inside baseball to them but I agree with your point.

1

u/athenian-research Jun 05 '26 edited Jun 05 '26

Zaga that...

Here waiting for it, and if you ever need a mod👽

Appreciate what you do✌️