Cash Flow vs Net Income – Amazon’s Net Income is at $2.37 billion whereas, its Cash Flow from Operations is at $16.44 billion. Why there is a difference between the two? Cash Flow and Net Income, both are two key factors in judging whether a company has been doing well or not. But how we can relate to each other?

In this article, we will have a look at both cash flow and net Income to make sense of how they work.

In this article, we will talk about the following –

• What are Cash Flows?
• What is Net Income?
• Cash Flow from Operations format and example
• Net Income format and example
• Apple Cash flow vs Net Income
• Positive Cash Flows and Postive Net Income Examples
• Snap Inc: Cash flow vs Net Income
• Negative Cash Flows and Negative Net Income Examples
• Pearsons: Cash flow vs Net Income
• Positive Cash flows and Negative Net Income Examples
• Netflix: Cash flow vs Net Income
• Negative Cash Flows and Postive Net Income Examples
• Conclusion

What are Cash Flows?

Cash flow statement is completely different that income statement. Let’s take an example to understand this.

A company has made revenue of $200 in 2016 and the expenses they have incurred was $110. That means, the net profit is $(200 – 110) = $90.

But if we look from the point of view of cash flow statement, we need to consider the cash inflow and cash outflow. The company’s cash inflow was $170 (didn’t collect the whole amount in 2016) and the cash outflow was $90 (the rest of the amount would be paid in 2017). So the net cash inflow is $(170 – 90) = $80.

So it has been proven that even if the company made a profit of $90, its net cash inflow was $80.

And there lies the importance of cash flow statement. Cash flow statement helps an investor recognize the cash inflow and cash outflow of the company so that they don’t get allured by the hefty profits/ revenue).

It has often been seen that net cash flow is negative for a company even after earning a whopping profit. So, without looking at cash flow statement, an investor cannot conclude about the performance of a company year by year.

What is Net Income?

Profit or net income is the “bottom line” of the income statement of the company.

To ascertain the profit or net income, a company needs to set up an income statement and find out the net balance of income and expenses.

These income and expenses are reported because the transactions have been done whether or not the cash has been a pair or received.

In the next section below, we will see how to set up a cash flow statement (direct & indirect method both) and income statement to ascertain the net income.

Cash Flow from Operations format and example

First, we will only look at the format of the indirect method of cash flow statements along with example as it is directly related to the net income. And then, we will look at the format of net income as well as the example of the same.

Computation of Cash Flow from Operating Activities

• Here lies the importance of net income in cash flow statement. To start off the computation of cash flow from operating activities, you need to start with the net income (we will learn how to find out net income in the next section).
• Then, you need to add back all the non-cash items like depreciation and amortization. We will add them back because they are not actually expenses in cash (only in record).
• You need to do the same for sales of assets. If the company has incurred any loss on the sale of assets (which is not actually loss in cash), we will add back and if the company has made any profit on the sale of assets (which is not actually profit in cash), we will deduct the amount.
• Next, we need to take into account any changes that took place during the year in regards to non-current assets.
• Finally, we will add back or deduct any changes in the current liabilities and assets. Please note that in current liabilities, we will not include notes payable and dividend payable.

Now, let’s have a look at the example of the computation of cash flow from operating activities of Amazon–

source: Amazon SEC Filings

You can see that in the example, we started with the net income and then made all the adjustments mentioned above. Non cash items like Depreciation and amortization, stock-based compensations are added back. Likewise, changes in operating assets and liablities like Inventories, accounts receivables, accounts payables and others.

You can learn Cash Flow Statements comprehensively from the following –

• Cash Flow from Operations
• Cash flow from Financing Activities
• Cash Flow from Investing Activities
• Cash Flow Analysis

Net Income format and example

As you can see that in order to compute the net cash flow, we need to refer to the net income (profit). After taking the net income into account, we can add back or deduct the respective adjustments and will ascertain the net cash flow from operating activities under indirect method of cash flow.

So, let’s have a look at the format and the example so that we can understand how to find out the net income at the first place.

Format

Have a look at the basic format so that we can understand what it is all about at the first place. And then we will take an example to illustrate it.

Particulars	Amount
Revenue	*****
Cost of Goods Sold	(*****)
Gross Margin	****
Labour	(**)
General & Administrative Expenses	(**)
Operating Income (EBIT)	***
Interest Expenses	(**)
Profit Before Tax	***
Tax Rate (30% of Profit before tax)	(**)
Net Income	***

Below is the snapshot of the Income Statement of Amazon.

source: Amazon SEC Filings

Now, if as an investor, you need to set up a cash flow statement under indirect method, you will be able to start off with the net income.

You can also learn about Income Statement from the following comprehensive articles

• Income Statement
• Income Statement vs Balance Sheet | Top 5 Differences
• Profit Margin | Gross | Operating | Net 

Apple Cash flow vs Net Income

Positive Cash Flows and Postive Net Income

See below Apple’s Cash Flow from Operations and Net Income. Both its Net Income and Cash Flows have been positive.

source: ycharts

Which companies have positive cash flows and positive net income?

There can be various reasons that can lead to positive cash flows and net income. Some of these are listed below –

• The company should have Strong Product Lines
• Should be profitable with strong and consistent Profit Margin
• Writeoffs, Asset Sale, and impairments should be insignificant relative to its Revenue

Positive Cash Flows and Postive Net Income Examples

Below are some examples of top companies with Postive cash flows and positive net income.

Name	Market Cap ($ mn)	CFO ($ mn)	Net Income  ($ mn)
Toyota Motor	161,334	43,974	23,584
Wells Fargo	278,551	169	21,938
Alphabet	635,433	36,036	19,478
Bank of America	247,106	18,306	17,906
Microsoft	536,267	33,325	16,798
Johnson & Johnson	357,041	18,767	16,540
China Mobile	211,921	38,108	16,334
Allergan	80,840	1,425	14,973
Wal-Mart Stores	227,082	31,530	13,643
Gilead Sciences	90,491	16,669	13,501

Snap Inc: Cash flow vs Net Income

Negative cash flows vs Negative net income

See below Snap’s Cash Flow from Operations and Net Income. Both its Net Income and Cash Flows are Negative.

source: ycharts

Which companies have Negative cash flows and Negative net income?

• Mostly, these are companies that do not generate enough revenues as compared to its expenses and investments
• They work on very thin margin or are loss making.
• Most Tech companies funded by external private equity investment and go for an IPO who such characteristics

Negative Cash Flows and Negative Net Income Examples

Below are some examples of top companies with negative cash flows and negative net income.

Name	Market Cap ($ mn)	CFO ($ mn)	Net Income ($ mn)
Tesla	51,449	(124)	(675)
Nokia	36,475	(1,609)	(848)
Halliburton	36,260	(1,703)	(5,763)
Symantec	17,280	(220)	(106)
Biomarin Pharmaceutical	15,793	(228)	(630)
Cheniere Energy	11,238	(404)	(610)
Alkermes	9,119	(64)	(208)
Seattle Genetics	7,331	(97)	(140)
Tesaro	7,260	(288)	(387)
Alnylam Pharmaceuticals	7,247	(308)	(410)

Pearsons: Cash flow vs Net Income

Postive Cash Flow and Negative Net Income

See below Pearsons Cash Flow from Operations and Net Income. Pearsons Net Income is Negative, however, its Cash Flows is positive. Why?

source: ycharts

The real reason is the Impairment of Intangible Assets. We note that Pearson’s impairment of intangible assets of $2,505 million has led to huge losses in 2016.

source: Persons SEC Filings

Which companies have Postive cash flows and Negative net income?

Some of the companies that may have the above traits are as follows –

• Negative Net income can be because the company is loss making.
• Mostly, Strong companies report losses due to Bad Debts writeoffs, impairments or business restructuring
• Net Income can be negative also because of Loss on Sale of Assets

Positive Cash flows and Negative Net Income Examples

Below are some examples of top companies with Postive cash flows and Negative net income.

Name	Market Cap ($ mn)	CFO ($ mn)	Net Income  ($ mn)
Vodafone Group	76,352	15,606	(6,909)
BHP Billiton	34,076	10,625	(6,385)
FirstEnergy	12,979	3,371	(6,177)
Hess	13,285	795	(6,132)
Petrobras	47,417	26,114	(4,838)
Perrigo Co	10,391	655	(4,013)
ConocoPhillips	53,195	4,403	(3,615)
Caesars Entertainment	1,804	308	(3,569)
California Resources	302	403	(3,554)
Endo International	2,523	524	(3,347)

Netflix: Cash flow vs Net Income

Negative Cash Flows and Postive Net Income

Please See below Netflix Cash Flow from Operations and Net Income. Netflix Net Income is Postive, however, its Cash Flows is Negative. Why?

source: ycharts

Let us have a look at Netflix Cashflow from Operating Activities.

We note that additions to streaming content assets in Netflix is an operating expense ($8,653 million in 2016) and has led to Negative Cash Flow from Operating Activities.

Negative Cash Flows and Postive Net Income Examples

Below are some examples of top companies with Negative cash flows and Positive net income.

Name	Market Cap ($ mn)	CFO ($ mn)	Net Income ($ mn)
UBS Group	65,183	(16,706)	3,252
CarMax	11,844	(468)	627
Credicorp	17,180	(438)	1,056
Oaktree Capital Group	7,301	(318)	195
General Electric	227,086	(244)	8,831
Enstar Group	3,939	(203)	265
SLM	4,900	(201)	250
Hilltop Holdings	2,614	(183)	146
TRI Pointe Group	2,139	(158)	195
White Mountains Insurance	3,932	(155)	413

Conclusion

The basic difference between net income and the net cash flow is following –

• First of all, in the case of net income, it doesn’t matter whether the transactions are in cash or not. That means when the net income and revenues are reported on the income statement when they are earned. But in the case of cash flow statement, we only deal with the cash and cash equivalents (how much cash comes in and how much cash goes out during a period).
• Second, some expenses which are considered in the income statement (like depreciation expenses or amortization expenses) are not actually cash expenses. But still, they are deducted from the revenue. In the case of cash flow statement, they should be added back to the net income to have no effect on the cash flow.
• Third, in the case of net income, even the profits and losses of other sources (consolidated income statement) are considered. But in the case of cash flow statement, they don’t add or reduce the cash.

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