Money-less profits

The profit-and-loss statement tells us the booked profit on an accrual basis. This means it may also state profits which are yet to be realised in cash but which are still considered as income for the current year. Therefore, it is important to analyse the cash-flow statement along with the profit-and-loss statement. The cash flow from operations gives the actual cash realised from the normal business of a company. Good-quality earnings should be backed by a healthy cash flow from operations in line with the EBITDA or operating profits. The gap between profits and the cash from operating activities may be due to various reasons. One, it may be due to the sector in which the company operates. An example of such a sector is the real-estate sector, where the income is realised later and hence the cash flow is not commensurate with the profit booked. A second case is poor management of receivables and payables. In this case the company is not able to realise cash from its debtors