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Regarding point #2, many in the finance world (which I work in) consider cash flow positive a better representation of actual profitability than the actual net

Regarding point #2, many in the finance world (which I work in) consider cash flow positive a better representation of actual profitability than the actual net profit/loss reported on the P&L. In short, cash flow shows if the actual core business is bringing in money or losing money, while the net profit includes a lot of "noise" (probably not the best word to use but can't think of how to phrase this). For example, depreciation is an expense reported on the P&L but the company isn't actually moving money out of their accounts to pay someone for depreciation. This is known as a non-cash expense and effects the overall net profit reported on the P&L. Also, companies can be motivated to show 0 or negative profit on the P&L to avoid paying corporate tax. Amazon was notorious for this as any profit they had, they would re-invest back into the business. Whenever I look at the profitability of the company, I don't look at the P&L number but jump to the cash flow statement and look at Net Cash Flows from Operating Activities (the first of three). First, I look if this positive, and second, if it is growing over time. Hope this helps

fleetside72 7y ago
Almost all companies re-invest at the rate of depreciation, which is why depreciation rates are a good approximation of cash you are going to have to spend. Move on down to "investing activities" on your cash flow to see all that "non-cash" depreciation bleeding out. Better yet, check out a balance sheet. Net income = change in balance sheet YoY.
danesparza 7y ago
"consider cash flow positive a better representation of actual profitability than the actual net profit/loss reported on the P&L" Wow. What a sad indictment of modern accounting practices that its accepted practice to create 'noise' to prop up a P&L (or avoid paying tax). I suppose you could do this with household expenses, but if you don't look at P&L in a household you would be ignoring things like credit card debt or car loans. This kind of debt in either a household or a company represents risk and shouldn't be overlooked, IMHO.
- JumpCrisscross 7y ago
  > What a sad indictment of modern accounting practices that its accepted practice to create 'noise' to prop up a P&L Income statements include things like depreciation. That's real, in a sense. It's future CAPEX. But for the present health of a business, particularly a levered one, cash is king. One way to think of it is in time frames. Cash flows are immediately relevant. If they're out of whack, it's an urgent problem. (They're also the most difficult to mess with.) Income statements are longer term. An unprofitable, cash-generating business may have structural issues with its PP&E, or it may be overleverd, or a bunch of options might have been issued or exercised. Balance sheets are the longest-term statement. (They're also the easiest to mess with.) Keep in mind, too, that income statements for investors are different from those prepared for the IRS.
  - rahimnathwani 7y ago
    "Income statements include things like depreciation. That's real, in a sense. It's future CAPEX." Depreciation is past capex, not future capex. You could argue that the two are equivalent, because the assets being depreciated will need replacement in the future. But: 1. The assets' useful life may be longer (or shorter) than the depreciation schedule. 2. The future replacements may cost less (or more) or just not be needed at all.
    - JumpCrisscross 7y ago
      > Depreciation is past capex, not future capex Technically (from an accounting perspective), yes. Practically (from a financial/economic perspective), not quite. Past capex is a sunk cost. Investors care about future cash flows. If you strip out depreciation, you’ll be surprised by the bill when your machine breaks down. (You may still be surprised. Life is unpredictable and depreciation schedules are an estimate. But that’s one of the problems the concept tries to solve.)
- thinkloop 7y ago
  It's not really a "sad indictment", there's nothing shady about re-investing your money into the business. It just so happens that if you are a fast growth company doing that, it is no longer beneficial to use the same tools to compare to traditional large established slow growth companies. Amazon fairly and legally and morally (mostly) re-invested their positive cash flow back into their business, but looking at their P&L you can't tell if they are a year 0 startup or an amazing giant company - the cashflow, however, reveals a different story.
cdolan 7y ago
Thanks. I am not a financial professional but do run a medium sized business and have a lot of respect for being cash flow positive. I agree with depreciation and other non cash expenses obfuscating P&Ls, but can we agree that in an article focused on securing debt financing, which will incur real interest expense, the term “free cash flow profitability”, “loosely” meaning “profitability” is a little misleading?
- notyourday 7y ago
  > I agree with depreciation and other non cash expenses obfuscating P&Ls, but can we agree that in an article focused on securing debt financing, which will incur real interest expense, the term “free cash flow profitability”, “loosely” meaning “profitability” is a little misleading It depends on the industry. DO is in the capex heavy industry so depreciation is not a funky accounting cost, it is actually something that's applicable to the vast majority of their assets.
  - wtvanhest 7y ago
    Yeah, this was my first thought. Technically if you go back in time and model past Cash Flow Statements, you could layer on what you think the real go forward infrastructure cost is to their CFS. If they are consistently laying out capex, it actually could be very reasonable to just use CFS and not opex.
  - treis 7y ago
    Software is not typically depreciated though. DO is writing code now that will last for decades but they have to take the accounting hit for it in one year.
    - scarface74 7y ago
      Code rarely last decades without maintenance and complete rewrites over time - unless you’re the government.
      - 7y ago
scarface74 7y ago
Not counting depreciation as part of your loss in a business is about like all of the Uber drivers who don’t take into account the wear and tear on their cars when calculating how much money they are making. Depreciation is a real expense. If you depreciate an asset down from $1000 to $0 in 3 years, you’re accounting for the fact that in three years you are going to have to replace it. There is a reason we have GAAP, to keep crap like WeWork’s “Community Adjusted Ebitda” and Uber from saying that their financials really aren’t as bad as they look if you ignore a dozen expenses.
- chii 7y ago
  > If you depreciate an asset down from $1000 to $0 in 3 years, you’re accounting for the fact that in three years you are going to have to replace it. but does a company have to be "honest" about such depreciations? What if the asset isn't actually losing value at the stated depreciation rate? Then at the end of the depreciation period, the company may still extract the residual value by either selling or continue using the asset. Does that somehow then count as revenue? Or did they just magically managed to tax dodge using a fake depreciation schedule?
  - scarface74 7y ago
    The asset will eventually have to be replaced. In the long term, it doesn’t make a difference - ignoring the time value of money. Theoretically, the only reason we have depreciation expenses at all instead of just expensing the entire cost at once (cash accounting) is that we decided that accrual accounting was more representative than cash based accounting. I am not an accountant. I’m an MBA dropout after almost finishing.
    - ToFundorNot 7y ago
      Also, taxes. If we were able to fully expense capital plants and equipment, there wouldn't a single company paying taxes, they would continually purchase more to offset profit, eliminate taxation, and accelerate growth.
hef19898 7y ago
Which makes perfectly sense. A company can be cash positive and profitable, cash negative and profitable (worked at a place like that, didn't end well), cash positive and not profitable (at least that company would be by default alive, and if revenue is growing quite healthy IMHO) or cash negative and not profitable (in that case death could happen any moment). I understood the OP that mixing cash and profitability in one term is wrong. So yeah, I agree that the CEO told BS.
IAmEveryone 7y ago
The rules around deprecation and so on are at least intended to give a “better” picture about the health of some business, so it’s somewhat strange when we start going back the “lesser” data of cash flow. As just one example, if you pay for supplies in one accounting period, but only sell (and get paid) in the next, cash flow will fluctuate widely, even if your business is entirely stable.

fleetside72 7y ago

Almost all companies re-invest at the rate of depreciation, which is why depreciation rates are a good approximation of cash you are going to have to spend. Move on down to "investing activities" on your cash flow to see all that "non-cash" depreciation bleeding out. Better yet, check out a balance sheet. Net income = change in balance sheet YoY.

danesparza 7y ago

"consider cash flow positive a better representation of actual profitability than the actual net profit/loss reported on the P&L" Wow. What a sad indictment of modern accounting practices that its accepted practice to create 'noise' to prop up a P&L (or avoid paying tax). I suppose you could do this with household expenses, but if you don't look at P&L in a household you would be ignoring things like credit card debt or car loans. This kind of debt in either a household or a company represents risk and shouldn't be overlooked, IMHO.

JumpCrisscross 7y ago
> What a sad indictment of modern accounting practices that its accepted practice to create 'noise' to prop up a P&L Income statements include things like depreciation. That's real, in a sense. It's future CAPEX. But for the present health of a business, particularly a levered one, cash is king. One way to think of it is in time frames. Cash flows are immediately relevant. If they're out of whack, it's an urgent problem. (They're also the most difficult to mess with.) Income statements are longer term. An unprofitable, cash-generating business may have structural issues with its PP&E, or it may be overleverd, or a bunch of options might have been issued or exercised. Balance sheets are the longest-term statement. (They're also the easiest to mess with.) Keep in mind, too, that income statements for investors are different from those prepared for the IRS.
- rahimnathwani 7y ago
  "Income statements include things like depreciation. That's real, in a sense. It's future CAPEX." Depreciation is past capex, not future capex. You could argue that the two are equivalent, because the assets being depreciated will need replacement in the future. But: 1. The assets' useful life may be longer (or shorter) than the depreciation schedule. 2. The future replacements may cost less (or more) or just not be needed at all.
  - JumpCrisscross 7y ago
    > Depreciation is past capex, not future capex Technically (from an accounting perspective), yes. Practically (from a financial/economic perspective), not quite. Past capex is a sunk cost. Investors care about future cash flows. If you strip out depreciation, you’ll be surprised by the bill when your machine breaks down. (You may still be surprised. Life is unpredictable and depreciation schedules are an estimate. But that’s one of the problems the concept tries to solve.)
thinkloop 7y ago
It's not really a "sad indictment", there's nothing shady about re-investing your money into the business. It just so happens that if you are a fast growth company doing that, it is no longer beneficial to use the same tools to compare to traditional large established slow growth companies. Amazon fairly and legally and morally (mostly) re-invested their positive cash flow back into their business, but looking at their P&L you can't tell if they are a year 0 startup or an amazing giant company - the cashflow, however, reveals a different story.

cdolan 7y ago

Thanks. I am not a financial professional but do run a medium sized business and have a lot of respect for being cash flow positive. I agree with depreciation and other non cash expenses obfuscating P&Ls, but can we agree that in an article focused on securing debt financing, which will incur real interest expense, the term “free cash flow profitability”, “loosely” meaning “profitability” is a little misleading?

notyourday 7y ago
> I agree with depreciation and other non cash expenses obfuscating P&Ls, but can we agree that in an article focused on securing debt financing, which will incur real interest expense, the term “free cash flow profitability”, “loosely” meaning “profitability” is a little misleading It depends on the industry. DO is in the capex heavy industry so depreciation is not a funky accounting cost, it is actually something that's applicable to the vast majority of their assets.
- wtvanhest 7y ago
  Yeah, this was my first thought. Technically if you go back in time and model past Cash Flow Statements, you could layer on what you think the real go forward infrastructure cost is to their CFS. If they are consistently laying out capex, it actually could be very reasonable to just use CFS and not opex.
- treis 7y ago
  Software is not typically depreciated though. DO is writing code now that will last for decades but they have to take the accounting hit for it in one year.
  - scarface74 7y ago
    Code rarely last decades without maintenance and complete rewrites over time - unless you’re the government.
    - 7y ago

scarface74 7y ago

Not counting depreciation as part of your loss in a business is about like all of the Uber drivers who don’t take into account the wear and tear on their cars when calculating how much money they are making. Depreciation is a real expense. If you depreciate an asset down from $1000 to $0 in 3 years, you’re accounting for the fact that in three years you are going to have to replace it. There is a reason we have GAAP, to keep crap like WeWork’s “Community Adjusted Ebitda” and Uber from saying that their financials really aren’t as bad as they look if you ignore a dozen expenses.

chii 7y ago
> If you depreciate an asset down from $1000 to $0 in 3 years, you’re accounting for the fact that in three years you are going to have to replace it. but does a company have to be "honest" about such depreciations? What if the asset isn't actually losing value at the stated depreciation rate? Then at the end of the depreciation period, the company may still extract the residual value by either selling or continue using the asset. Does that somehow then count as revenue? Or did they just magically managed to tax dodge using a fake depreciation schedule?
- scarface74 7y ago
  The asset will eventually have to be replaced. In the long term, it doesn’t make a difference - ignoring the time value of money. Theoretically, the only reason we have depreciation expenses at all instead of just expensing the entire cost at once (cash accounting) is that we decided that accrual accounting was more representative than cash based accounting. I am not an accountant. I’m an MBA dropout after almost finishing.
  - ToFundorNot 7y ago
    Also, taxes. If we were able to fully expense capital plants and equipment, there wouldn't a single company paying taxes, they would continually purchase more to offset profit, eliminate taxation, and accelerate growth.

hef19898 7y ago

Which makes perfectly sense. A company can be cash positive and profitable, cash negative and profitable (worked at a place like that, didn't end well), cash positive and not profitable (at least that company would be by default alive, and if revenue is growing quite healthy IMHO) or cash negative and not profitable (in that case death could happen any moment). I understood the OP that mixing cash and profitability in one term is wrong. So yeah, I agree that the CEO told BS.

IAmEveryone 7y ago

The rules around deprecation and so on are at least intended to give a “better” picture about the health of some business, so it’s somewhat strange when we start going back the “lesser” data of cash flow. As just one example, if you pay for supplies in one accounting period, but only sell (and get paid) in the next, cash flow will fluctuate widely, even if your business is entirely stable.