Profit vs cash: when the two numbers disagree

Three numbers, one year, and they don't agree.

Sameer has all three on a sticky note. He has been staring at it since lunch.

Part one, from ₹9 crore to ₹14 crore

Indian listed companies show operating cash by the indirect method: start from profit, then undo everything that wasn't cash. Here is Sameer Chai's walk, one line at a time.

Five adjustments. Each one has a reason.

Tax, out and back in. The walk starts from profit before tax, so we add back the ₹3 crore tax charge, then take off the tax actually paid at the end. For us both are ₹3 crore, so they cancel. At many companies they don't: tax paid can run ahead of or behind the tax charged.

Depreciation, the big one. The P&L charged ₹4 crore for kiosks, kettles and vans wearing out (₹3.5 crore) and the ordering app being written off (₹0.5 crore). No cheque was written for any of it this year. The cash left when the kit was bought. So it goes back in.

Interest, moved, not removed. The ₹2 crore of interest is real cash out, but it doesn't belong in this section. We add it back here and show it lower down, under financing.

Working capital, the quiet one. During the year, ₹1 crore more got tied up in stock, money owed by café customers and supplier bills, taken together. Cash that's sitting in milk on a shelf or in a café's unpaid invoice isn't in the bank. So it comes off.

At the end of the year, without the cash, our working capital is ₹10 crore of stock and customer dues against ₹15 crore of bills: minus ₹5 crore. Customers pay for chai at once, and suppliers wait. That's why the working-capital line is small for us. For a company that sells on 90 days' credit, it can swallow most of the profit.

Why interest sits further down

An Indian rule, not a global one

That has one useful effect. When you compare two Indian companies' operating cash, neither has quietly moved interest in or out. It also means operating cash is a number before paying lenders, so a heavily borrowed company can show healthy operating cash and still struggle once the interest is paid. Look at both sections.

Part two, from ₹14 crore in to ₹8 crore down

Operating cash is only the first of three sections.

The ₹15 crore of capex is the key. It isn't in the P&L at all this year. It sits on the balance sheet as kiosks and vans: ₹69 crore of fixed assets at the start, plus ₹15 crore bought, minus ₹4 crore of depreciation, gives ₹80 crore at the end. Over the next few years it will come back into the P&L as depreciation, a slice at a time.

Take capex from operating cash and you get free cash flow: 14 − 15 = minus ₹1 crore. We spent slightly more on growth than the business brought in. Then financing took ₹7 crore more. The gap of ₹8 crore came out of cash we already had from the IPO.

Three patterns that should make you look twice

Our year is easy to explain. These three patterns aren't always trouble, but each one is a reason to open the notes.

1. Receivables growing faster than sales

Receivables are money customers owe for things already sold and already counted as revenue. If sales rise 10% and receivables rise 40%, profit is being booked faster than the cash is arriving.

The quick test is receivable days: receivables ÷ revenue × 365. Ours is 5 ÷ 120 × 365, about 15 days. That's low, because most chai is paid for on the spot and only the café and office customers buy on credit. Work the same number for two or three years in a row. If it keeps climbing, ask why. Customers taking longer to pay, looser credit terms to win sales, or sales pushed out just before the year end all look the same at first.

The balance sheet notes split trade receivables by how long they've been unpaid. A growing pile in the oldest columns is the bit to read slowly.

2. Profit up, operating cash down

One year of this can be innocent, like a big order paid for after the year end. Several years in a row is different. Add up profit and operating cash over three to five years. In a healthy business, the totals stay roughly in step, and operating cash is often the bigger one, because depreciation is added back.

When profit keeps rising and operating cash doesn't follow, the walk above tells you where to look: a working-capital line that takes more each year, usually from receivables or stock, or tax paid running well behind tax charged.

3. Big other income

Schedule III makes every company show other income as its own line in the P&L, separate from revenue from operations. It covers things like interest on deposits, dividends from investments and gains on selling assets. Those are real, but they aren't the business.

Sameer Chai has none: all ₹9 crore of profit comes from chai. Some companies earn a big slice of their profit this way. Two checks help. First, take other income out and see what's left of profit. Second, look at the cash flow statement: interest and dividends received appear under investing, not operations, so profit propped up by other income can sit next to weak operating cash for exactly that reason.