Daily Economics, Business and Finance Study

September 24, 2026 (KST) · Day 5
Today's topic: Why Is There No Cash Despite a Profit? Operating, Investing and Financing Cash Flows

1. Review of the previous lesson

On Day 4, we learned that the balance sheet shows assets, liabilities and equity at a point in time, and that changes in cash, receivables, inventories, tangible assets and debt explain financial strength. Today, we use the cash flow statement to trace why cash increased or decreased between two reporting dates.

2. Today's core concepts

The cash flow statement divides changes in cash into three activities.

The three cash flows, together with exchange-rate effects and other items, reconcile opening cash to closing cash.

\[\text{Closing cash}=\text{Opening cash}+\text{Operating cash flow}+\text{Investing cash flow}+\text{Financing cash flow}+\text{FX and other effects}\]

Net income represents accounting performance, while the cash flow statement shows actual cash movements. Therefore, net income may not equal the increase in cash.

3. Concepts explained

3-1. Accrual accounting: Revenue can arise before cash is received

Financial statements generally use accrual accounting. Revenue and expenses are recognized when the economic transaction occurs, rather than when cash is received or paid.

For example, a credit sale of products worth 100 (KRW 100 million units) may be recorded as:

• Income statement: Recognize revenue of 100 (KRW 100m)
• Balance sheet: Receivables increase by 100 (KRW 100m)
• Cash flow statement: No cash inflow yet because the customer has not paid

Therefore, even with higher revenue and net income, operating cash flow may be weak if receivables or inventories rise significantly.

3-2. Operating cash flow: Cash generation from the core business

Cash flow from operating activities is also called OCF or CFO.

• OCF: Operating Cash Flow
• CFO: Cash Flow from Operations

The two abbreviations generally have the same meaning.

Cash flow statements use either the direct or the indirect method.

Direct method

Directly shows cash received from customers and cash paid to suppliers, employees and others.

Indirect method

Starts with net income and adjusts for non-cash items and working-capital movements. The indirect method is widely used in listed-company disclosures.

The basic structure is:

\[OCF=\text{Net income}+\text{Non-cash expenses}-\text{Non-cash income}\pm\text{Working-capital changes}\]

Typical non-cash expenses added back to net income

• Depreciation
• Amortization of intangible assets
• Stock-based compensation
• Bad debt expense
• Provision expenses
• Asset impairment losses

These expenses reduce net income but may not involve an equal cash outflow in the same period, so they are added back when calculating OCF.

Typical non-cash or non-operating gains deducted from net income

• Gains on disposal of tangible assets
• Gains on valuation of financial assets
• Equity-method earnings
• Some derivative valuation gains

For example, a gain on selling land is included in net income, but the sale proceeds normally appear in investing cash flow. The disposal gain is removed when adjusting OCF to avoid double counting.

3-3. Working-capital changes: The key to converting earnings into cash

This is one of the most commonly misunderstood areas of cash flow analysis.

Increase in receivables

Credit sales have been recognized, but cash has not yet been collected.

\[\text{Receivables increase}\rightarrow\text{OCF decreases}\]

Increase in inventories

Cash has been used to obtain raw materials or products that have not yet been sold.

\[\text{Inventories increase}\rightarrow\text{OCF decreases}\]

Increase in accounts payable

Raw materials or other items have been purchased, but suppliers have not yet been paid.

\[\text{Accounts payable increase}\rightarrow\text{OCF increases}\]

Increase in contract liabilities and customer advances

Cash has been received from customers, but revenue has not yet been recognized.

\[\text{Contract liabilities increase}\rightarrow\text{OCF increases}\]

This can be summarized as follows.

The specific items classified as working capital vary by company and industry, so check the disclosures.

3-4. Investing cash flow: Using cash for future growth

Investing cash flow mainly covers purchases and sales of long-term assets and investments.

Typical cash outflows include:

• Purchases of property, plant and equipment
• Investment in factories, production equipment, servers and data centers
• Purchases of intangible assets and software
• Acquisitions of subsidiaries or other companies
• Purchases of long-term financial instruments and securities
• Investments in associates

Typical cash inflows include:

• Sales of property, plant and equipment
• Sales of subsidiaries or business units
• Sales of investment stocks and bonds
• Proceeds from maturing financial instruments

Negative investing cash flow is not necessarily bad. Growth companies investing to expand capacity and future revenue may report strongly negative investing cash flow.

The important question is:

Can the invested cash translate into higher future revenue, profit and OCF?

3-5. CapEx: Capital expenditure to maintain and expand the business

CapEx stands for capital expenditure: funds spent acquiring long-lived assets such as factories, equipment, servers and buildings.

Look for cash flow statement labels such as:

• Acquisition of property, plant and equipment
• Additions to property, plant and equipment
• Purchases of property and equipment
• Capital expenditures

Note that CapEx may not be separately defined as a single official financial-statement item under accounting standards. Companies differ in whether they include:

• Purchases of property, plant and equipment
• Purchases of intangible assets
• Internally developed software
• Equipment obtained through leases
• Equipment acquired in business combinations
• Equipment acquired but not yet paid for in cash

Use consistent definitions when comparing CapEx across companies.

3-6. Financing cash flow: Raising capital and returning it to shareholders

Financing cash flow shows cash transactions with creditors and shareholders.

Cash inflows

• Bank borrowing
• Corporate bond issuance
• New equity issuance
• Convertible bond issuance
• Capital contributions from non-controlling shareholders in subsidiaries

Cash outflows

• Debt repayment
• Corporate bond repayments
• Dividend payments
• Share repurchases
• Lease principal repayments
• Capital reductions and returns of capital

Positive financing cash flow often means external funds were raised; negative financing cash flow often means cash was returned through debt repayments, dividends or share repurchases.

However, the sign alone does not establish whether it is good or bad.

• More borrowing by a growth company: May be sound financing for capacity expansion
• Repeated borrowing to cover losses: May signal financial risk
• Negative financing cash flow: May reflect healthy debt repayment funded by sufficient OCF
• Excessive buybacks: Can increase risk if funded with debt

3-7. Common reasons net income and OCF differ

OCF exceeding net income is not always positive. It may result from delaying supplier payments or temporarily collecting unusually large customer advances.

Conversely, OCF below net income can be temporary if the company is building inventory normally ahead of a new product launch. The key is the cause and whether it is recurring..

3-8. Connecting the three financial statements

The three financial statements studied so far connect as follows.

4. A simple numerical example

The following is a Hypothetical educational annual cash flows for manufacturing company A. Monetary amounts are in KRW 100 million units.

① Operating cash flow

The calculation is:

\[ OCF=100+60+10-5-30-20+15=130 \]

Net income is 100, but after adjusting for non-cash expenses such as depreciation and for working-capital movements, OCF is 130 (units: KRW 100 million).

② Investing cash flow

\[ ICF=-90-10+5=-95 \]

③ Financing cash flow

\[ CFF=40-20-25-10=-15 \]

④ Reconcile opening cash to closing cash

Assuming no exchange-rate effects:

\[\text{Net increase in cash}=130-95-15=20\]

If opening cash was 80 (KRW 100 million units):

\[\text{Closing cash}=80+20=100\text{ (KRW 100m)}\]

⑤ A simple FCF calculation

The most common simple calculation is:

\[ FCF=OCF-CapEx \]

Using tangible asset purchases of 90 (KRW 100 million units) as CapEx:

\[FCF=130-90=40\text{ (KRW 100m)}\]

Here, tangible asset purchases appear in the cash flow statement as -90 but in the FCF formula, CapEx is the positive spending amount of 90, which is then deducted. 130-(-90) is not the correct calculation.

5. Practical use in stock and company analysis

① First compare net income with OCF

Look at the latest 4 quarters combined and the 3–5-year trend alongside individual quarters.

② Break down why OCF improved

Even if these two companies both have OCF of 200 (KRW 100 million units), its quality can differ.

• B: OCF improved because operating income and net income increased
• C: OCF improved because inventories fell and supplier payments were delayed

B's improvement is relatively more likely to persist, while C's working-capital effect may not recur.

③ Do not automatically view negative investing cash flow as bad

When examining CapEx, ask:

• Is it maintenance or expansion investment?
• How much will capacity increase after the investment?
• Are customer demand or long-term contracts already secured?
• Is the investment return likely to exceed the cost of capital?
• Is the investment funded by OCF or borrowing?
• How much will depreciation and interest expense rise after completion?

In capital-intensive industries such as semiconductors and data centers, FCF can deteriorate even with strong OCF growth if CapEx rises faster.

④ Use financing cash flow to assess funding shortfalls

Watch for this pattern.

\[\text{Insufficient OCF}\rightarrow\text{Borrowing or equity issuance}\rightarrow\text{Covering operating losses}\rightarrow\text{More borrowing or equity issuance}\]

The following pattern is relatively healthier.

\[\text{Sufficient OCF}\rightarrow\text{CapEx spending}\rightarrow\text{Debt repayment, dividends and buybacks}\]

⑤ Check whether buybacks and dividends are covered by FCF

If dividends and buybacks consistently exceed FCF, the shortfall must be funded from existing cash or borrowings.

For example, the following shareholder returns would be difficult to sustain for long.

• FCF: 100 (KRW 100m)
• Dividends: 80 (KRW 100m)
• Share repurchases: 70 (KRW 100m)
• Total shareholder returns: 150 (KRW 100m)

\[\text{Shareholder returns}-FCF=150-100=50\text{ (KRW 100m) shortfall}\]

However, a temporary excess distribution is not necessarily negative if the company has substantial cash.

⑥ Watch for cumulative figures in quarterly filings

Cash flow statements in Korean quarterly reports and US 10-Q filings are usually presented on a year-to-date basis.

For example, suppose:

• First-half cumulative OCF: 300 (KRW 100m)
• Cumulative OCF through Q3: 500 (KRW 100m)

Standalone Q3 OCF is:

\[\text{Standalone Q3 OCF}=500-300=200\text{ (KRW 100m)}\]

Mistaking the cumulative 500 (KRW 100 million units) for standalone Q3 results would significantly distort the analysis.

6. What to look for in disclosures

Korean companies: DART

Financial Supervisory Service DART In annual, half-year and quarterly reports, start with the Consolidated cash flow statement as your first check.

In particular, check:

• Whether OCF improvement comes from higher net income or working-capital release
• Whether tangible asset purchases match company-reported CapEx
• Whether any acquired equipment has not yet been paid for in cash
• Whether the cash flow statement is standalone quarterly or year-to-date

US companies: 10-K and 10-Q

SEC EDGAR Check the following items there.

• 10-K Item 8 / 10-Q Part I, Item 1
• Consolidated Statements of Cash Flows
• Net cash provided by operating activities
• Purchases of property and equipment
• Acquisitions, net of cash acquired
• Proceeds from issuance of debt
• Repayments of debt
• Repurchases of common stock
• Dividends paid
• Supplemental cash flow information

FCF in US earnings releases may be a company-defined non-GAAP measure. Always check:

• The company's FCF formula
• The scope of CapEx
• Whether lease-related payments are included
• Treatment of acquisition-related cash spending
• Items excluded by the company, such as restructuring costs
• Whether the figures are standalone quarterly or cumulative

Interest- and dividend-related cash flow classifications can also differ according to accounting standards and company policies. Align classification rules when comparing companies.

7. Key takeaways

• The cash flow statement divides cash movements into operating, investing and financing activities.
• Net income is accrual-based accounting profit and can differ from the actual increase in cash.
• Indirect-method OCF adjusts net income for non-cash items and working-capital changes.
• Increases in receivables and inventories generally reduce OCF, while increases in payables and contract liabilities increase it.
• Negative investing cash flow is not always bad; what matters is whether investment leads to future revenue and cash flow.
• Financing cash flow shows funding and shareholder returns through borrowing, repayments, equity issuance, dividends and buybacks.
• Simple FCF is generally calculated as OCF－CapEx but CapEx definitions must be consistent across companies.
• Quarterly cash flow statements are often cumulative, so subtract the prior cumulative amount to calculate standalone quarterly results.

8. Three review questions

Question 1

Calculate simple OCF for a company with net income of 120, depreciation of 40, an increase in receivables of 25, a decrease in inventories of 10 and a decrease in payables of 5 (units: KRW 100 million). Assume no other adjustments.

Question 2

If OCF is 300 and CapEx for tangible assets is 180 (units: KRW 100 million), what is simple FCF?

Question 3

D's net income rose 30%, but OCF fell 40%. At the same time, receivables and inventories grew much faster than revenue. What risks should you investigate first?

Answers and explanations

Answer 1

• Add depreciation because it is a non-cash expense.
• Subtract the increase in receivables because cash has not been collected.
• Add the decrease in inventories because previously tied-up cash is released.
• Subtract the decrease in payables because cash was paid to suppliers.

\[OCF=120+40-25+10-5=140\text{ (KRW 100m)}\]

Answer 2

\[FCF=OCF-CapEx=300-180=120\text{ (KRW 100m)}\]

Answer 3

First check the following risks.

• More credit sales and delayed customer collections
• Accumulation of unsold inventories
• Possible future bad-debt charges or inventory write-downs
• Declining earnings quality because accounting revenue and profit growth are not converting into actual cash

However, the changes may reflect normal inventory building ahead of a new launch or temporary payment-term changes. Check management's explanation and subsequent collection and sales performance.

Next lesson — Day 6:
“Why FCF Is Central to Enterprise Value: OCF, CapEx, Maintenance and Growth Investment”