Cash flow versus profit

"Intrinsic value is the number that — if you were all-knowing about the future and could predict all the cash that a business would give you between now and Judgment Day, discounted at the proper discount rate — that number is the intrinsic value of a business."

Intrinsic value is the number that — if you were all-knowing about the future and could predict all the cash that a business would give you between now and Judgment Day, discounted at the proper discount rate — that number is the intrinsic value of a business.

Net income can be positive while a company is burning cash - two different numbers, both true, telling different stories.

Net income includes accounting entries that don't move a single dollar of cash, like depreciation. Free cash flow, on the other hand, is the real money left over after paying operating expenses and the investments needed to keep the business running - what the company can actually distribute, reinvest, or use to pay down debt.

A wide gap between net income and free cash flow isn't a red flag by itself: a fast-growing company often invests today to grow tomorrow, and that lowers free cash flow even when the business is doing well. The signal to watch is the direction over time - if the gap widens quarter after quarter with no explanation tied to new investment, it's worth understanding why.

Free cash flow is harder to distort with accounting choices than net income, because it requires money to actually move in and out of the company's accounts. It's no accident that people often talk about earnings quality by comparing reported net income with operating cash flow: if the first grows systematically faster than the second, for several quarters in a row, that's a signal worth investigating, not ignoring.