Lesson 2 of 8
Balance Sheet & Cash Flow
What the company owns, owes, and actually generates
Balance Sheet
Assets: cash, inventory, property, IP
Liabilities: debt, accounts payable
Equity: what's left for shareholders
Snapshot of a moment in time
Cash Flow Statement
Operating: cash from running the business
Investing: buying equipment, acquisitions
Financing: debt, buybacks, dividends
Shows actual cash movement
A company can report profits on the income statement but still be running out of cash. Enron looked profitable on paper right up until it collapsed. The cash flow statement shows what's real.
Balance sheet health across real companies
Apple
$30B cash, $97B debt, but generating $105B of free cash flow every year. Debt is a non-issue.
Berkshire
Sits on an enormous cash pile. Has optionality no one else has.
Netflix
Finally cash-flow positive after years of content burn. Clear turnaround.
Uber
Took a decade. Now profitable on a cash basis, but stock already priced it in.
Carvana
Cash flow negative while carrying billions in debt. One rough quarter from trouble.
Free cash flow is the oxygen. A company with shrinking FCF and rising debt is in trouble no matter what the headline earnings say.
red flag
If net income is high but free cash flow is low or negative, the company might be using accounting tricks to look profitable. Always check cash flow.
Check yourself
Why is free cash flow sometimes more important than net income?