Step 5 of 8

Cash Flow Quality

Accounting profit balance sheet par dikhaya ja sakta hai, lekin bank account ka asli cash jhooth nahi bolta! Is step mein hum check karte hain ki company jo profit report kar rahi hai, kya woh actually hard cash mein convert ho raha hai?

~120 Stocks Step 4 ke baad
~50 Survive Real cash generators
CFO > PAT Real Cash Check
Warren Buffett ka famous quote: "Earnings can be pliable like putty, but cash flow is cold hard reality." Agar company 5 saal se profit dikha rahi hai lekin Cash from Operations negative hai, toh woh profit sirf paper par hai!
CFO vs Net Income (Cash Conversion Ratio)
Quality of Earnings · Fraud Filter
Step 5.1
1. Ye kya hai? (What is it?)

CFO (Cash Flow from Operations): Core business se aane wala actual cash.
Net Income (PAT): Accrual accounting ke rules ke mutabiq report kiya gaya profit.

Ratio = Cumulative 5Y CFO ÷ Cumulative 5Y Net Profit
• Ratio ≥ 0.8 to 1.0+: Excellent! Jo profit report hua, woh cash mein bank account mein aaya.
• Ratio < 0.5: Warning! Half se zyada profit sirf credit entries hain, customer cash nahi de rahe.

2. Asli Indian Example

HUL / Nestle vs Real Estate/Infra Cos (Pre-2020):
FMCG companies jaise HUL ka CFO/PAT ratio consistently 100%+ hota hai kyunki distributors se advance ya fast cash collection hoti hai.

Purane zamane ki kuch infrastructure companies hazaron crore ka PAT dikhati thi, lekin CFO negative hota tha. Unka sara cash unbilled revenue aur receivables mein phas jata tha, aur eventually unhe borrow karke survive karna padta tha.

3. Screener mein kaise dekhein?
Screener.in Query:
Cash from operations > 0 AND Free cash flow > 0
4. Ideal Range
CFO / PAT > 0.8: High Cash Quality CFO / PAT 0.6 – 0.8: Acceptable CFO / PAT < 0.5: Poor Cash Realization — Red Flag
Free Cash Flow (FCF) & FCF Yield
Shareholder Cash Generation
Step 5.2
1. Ye kya hai? (What is it?)

FCF = Cash Flow from Operations (CFO) − Capital Expenditure (Capex)

Ye wo surplus cash hai jo business ko chalane aur zaruri machinery/offices khareedne ke baad bachta hai. Isi paise se company Dividends, Share Buybacks aur Debt Repayment karti hai.

4. Ideal Range
FCF Positive consistently: Healthy Cash Engine FCF Yield > 4%: Very Attractive Valuation Persistent Negative FCF: Continuous Cash Drain
Step 5 Cash Flow Screener Query
Screener.in — Step 5 Cash Flow Master Query
Market Capitalization > 500 AND Debt to equity < 1 AND Return on capital employed > 15 AND Cash from operations > 0 AND Free cash flow > 0 AND Sales growth 5Years > 10