Analysis Of Net Profit Minus Cash Content

In contrast to cash flow, net profit (income) is formed on the basis of accrual basis, based on the ratio of cost to income and causality.

Cash flow is a reflection of cash in and out.

The difference between net profit and cash flow is not only reflected in quantity, but also plays a different role in evaluating the financial situation of enterprises.

The net profit and cash flow of the company are exactly the same in the whole period of existence, but it is a coincidence that the amount is the same in a certain accounting period.

The difference between the two is due to the adoption of different accounting concepts and time lapse.

Formula: net profit, cash content = net cash flow / net profit

Net cash flow is calculated based on cash flow and net profit is based on cash flow.

Calculated, for example, a company receives a large amount of advance payments, does not confirm revenue, does not calculate profits, but receives cash, so this proportion will be very high.

The bank is a special industry. The cash flow on which it is based is not based on sales. What he calls income is loan interest and expenditure refers to depositors' interest on deposits, interest on lending and so on.

The cash flow of banks depends on the acquisition of deposits and the recovery of loans. Therefore, negative indicators for a certain period of time do not account for the performance of banks. This indicator is of little reference value to the banking industry.

It is manifested in the following aspects:

1, capital expenditure.

Capital expenditure is a cash outflow when payment is made, but in the future it will be used as a write off in the form of depreciation in its estimated useful life.

Therefore, in any accounting period, if the capital expenditure exceeds depreciation, the excess amount is the amount of cash flow less than the net profit; on the contrary, it is the opposite.

2. Inventory turnover.

The increase in purchase is a cash outflow when payment is made, and it can be written off only if the net profit is sold later.

Therefore, during an accounting period, if the stock is increased, the cash flow will be lower than the net profit. The lower amount is the increase; if the inventory or WIP is reduced, of course, the opposite is true.

3. Accounts receivable and payable.

Account receivable reflects credit sales and accounts receivable corresponding credit purchase expenses at the invoice stage, the profit is calculated, and only when cash settlement is used later is the increase or decrease of cash flow.

Therefore, if the accounts receivable increase during an accounting period, the cash flow will be lower than the net profit; if the accounts payable increase, the cash flow will be higher than the net profit.

On the contrary, the opposite is true.

4, the flow of additional funds.

There are additional funds to enter enterprises or enterprises to repay loans, all of which are cash flows, but only have some impact on the balance sheet, and have no effect on net profit.

It is precisely because of the above four constraints that the difference between net profit and cash flow is formed.

An unfortunate fact in the production and operation of enterprises is that when the enterprise is expanding, capital expenditure will exceed depreciation, and all kinds of inventory turnover will also increase. At the same time, receivables and payables will also increase. Therefore, profitable expansion must be accompanied by excessive negative cash flow. This phenomenon is known as "over operating capital operation", that is, when expansion does not properly control negative cash flow and capital needed to increase investment. This is a common cause of enterprise bankruptcy. It is also the reason why enterprises lose money and the cash flow of operating activities is positive, or the cash flow of operating activities is negative.

Net cash content is negative, but the net inflow of cash is negative, not the company's lack of money.

Why some companies are profitable but do not have enough cash to pay wages, dividends and debt repayment. Some companies are not profitable but have enough cash to pay.

So, how to explain this phenomenon? We think that the reasons can be revealed by "net cash content" and "net cash operating activity cash content" index.

The net profit, cash content = net cash increase / net profit. The index reflects the reliability of the enterprise's net profit in the current period. If the index is greater than 1, it reflects sufficient net cash protection for the current net profit of the enterprise. Conversely, if the index is lower than "1" for a long time, it means that assets that have been identified as profits may contain fictitious assets that can not be converted into cash flows, such as accounts receivable or sluggish inventories which can not be recovered for a long time.

Net profit, cash content of business activities = net cash flow / net profit of operating activities. This index reflects the guarantee level of cash flow of net profit in current business activities.