Earnings quality: how much cash is in the profit
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Automated material · TradeAlmanac editorial deskPrepared by a language model from our stored data and checked by an editor.
Reported profit and the money in a company's accounts are different quantities, and a gap between them is normal. The question is its size and its persistence.
Where the gap comes from
Revenue is recognised on shipment while the money arrives later — the difference settles in receivables.
Depreciation reduces profit without being a cash expense.
Asset revaluations and exchange differences change profit without creating cash flows.
How to check
Compare operating cash flow with profit over several years:
1 415 000 000 000
In a healthy business they move together. Profit persistently exceeding cash flow means what was earned exists so far only in the accounts.
One-off items
An asset sale, a write-off, a one-time fine — all land in profit and will not repeat. Stripping them out by hand shows how much the business earns on a recurring basis.
Why it matters for dividends
Dividends are paid in money, not in profit. A company with high profit and weak cash flow funds payouts with debt — Dividend policy: how to read it and what to believe in it.
Related: The cash flow statement: why it is more honest than profit and Earnings per share: the metric easiest to improve without improving the business.
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Prepared by a language model from our stored data and checked by an editor.
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