The Restaurant That Made Money But Went Bankrupt
Chef Zhang's restaurant had ¥5 million in revenue last year. After all costs, net profit was ¥1 million. Looks great, right?
But here's the problem: ¥800K of that revenue is corporate IOUs that haven't been collected. He spent ¥600K renovating the kitchen. And he has ¥300K in loan payments due. His bank account is empty. The restaurant is profitable on paper but broke in reality.
Net Profit vs Free Cash Flow
Net Profit is an accounting concept — it includes revenue that hasn't been collected, depreciates equipment over time, and uses many assumptions. It can be manipulated.
Free Cash Flow (FCF) = Operating Cash Flow − Capital Expenditures. It's the actual cash left after running the business and reinvesting. You can't fake cash.
"A good company is one that makes money lying down — pure cash inflow. If a company reports high profits but has no cash, something is wrong."
| Metric | Net Profit | Free Cash Flow |
|---|---|---|
| What it measures | Accounting earnings | Actual cash generated |
| Can be manipulated? | Yes (accounting tricks) | Very hard to fake |
| Includes uncollected revenue? | Yes | No |
| Includes depreciation? | Yes (reduces profit) | No (adds it back) |
| Most useful for | Regulatory reporting | Actual business health |
Why FCF Matters More for Investors
💡 FCF Is King
- Dividends come from cash, not accounting profits
- Share buybacks require actual cash
- Debt repayment needs real money, not paper earnings
- A company with high profits but negative FCF is burning cash
- Warren Buffett: 'Owner earnings (≈FCF) is the real measure of a business'
Next time you look at a company, don't just check the bottom line. Ask: how much actual cash did this business generate?
💡 Key Summary
- Net profit is an accounting concept; FCF is real cash
- Profitable companies can go bankrupt if they run out of cash
- FCF = Operating Cash Flow − Capital Expenditures
- Look for companies where FCF ≥ Net Profit consistently
- Duan: 'Good companies make money lying down — pure cash inflow'
- When in doubt, follow the cash, not the earnings