Follow the Cash: What Free Cash Flow Reveals About Hidden Business Health | Quick ₹eads

by Karnivesh | 29 December, 2025

The Tale of Two Companies with the Same Earnings

Imagine two companies both report ₹100 Crore in net profit. On the surface, they look identical. But one is a fortress. The other is sinking.

The fortress converts those ₹100 Crore earnings into real cash sitting in its bank account. The sinking ship sees only ₹40 Crore actually hit the bank, while the rest vanishes into inventory buildup, stretched payment terms, or broken factories needing replacement.

This is the story Free Cash Flow (FCF) tells.

"Earnings are an opinion. Cash is a fact." And Free Cash Flow is the purest form of truth it shows not just what the company made, but what it actually kept after paying the bills that matter most.

The Formula: Simple Yet Powerful

Free Cash Flow = Operating Cash Flow − Capital Expenditure

Operating Cash Flow is the cash a company generates from its day-to-day operations selling products, collecting from customers, paying suppliers.

Capital Expenditure (CapEx) is the cash spent on maintaining and upgrading factories, machines, buildings, and technology.

The leftover? That's the free cash. It's free because the company can deploy it however it wants: pay dividends, reduce debt, acquire competitors, or reinvest in growth.

The Story of Maruti Suzuki: Manufacturing Reality

Take Maruti Suzuki, India's largest carmaker. In FY 2025, the company generated ₹14,012 Crore in Operating Cash Flow genuine cash from selling cars. But as a manufacturer, it had to invest heavily in factories and machinery: ₹10,242 Crore in CapEx.​

That leaves ₹3,771 Crore in Free Cash Flow.​

Now watch what happened: Despite generating ₹14,000+ Crore in cash from operations, Maruti distributed ₹3,422 Crore in dividends to shareholders. Why? Because the CFO and board knew with confidence: "This company will keep generating ₹14,000 Crore in operating cash. We can safely return cash while keeping the machinery running."​

Real Money or Accounting Magic? Comparing Operating Cash Flow to FCF Across Leading Companies 

Maruti's story reveals a healthy business. The company operates efficiently it converts roughly 8.5% of sales into operating cash. It doesn't waste cash on unnecessary capex. Investors sleep soundly.​

The Tech Paradox: TCS and Apple

Now look at Tata Consultancy Services (TCS). As a software company, it needs minimal factories. In FY 2025, TCS generated roughly ₹20,000 Crore in Operating Cash Flow with only ₹2,500 Crore in CapEx.​

That leaves ₹17,500 Crore in free cash nearly 88% of operating cash becomes truly free.

Compare this to Apple. Despite ₹11,825 Crore in operating cash flow, Apple only spent ₹1,080 Crore on CapEx just 9% of its operating cash. Free Cash Flow: ₹10,745 Crore.​

Here's the consultant's insight: A business that needs little CapEx is a business with pricing power and competitive moats. TCS and Apple don't need to reinvest heavily to stay competitive. They innovate through people and software, not factories. Their FCF margins are astronomical.

The Earnings Trap: When Profits Lie

This is where FCF becomes dangerous to ignore.

Asian Paints, a paint manufacturer, reported ₹5,460 Crore in net profit for FY 2024. Impressive. But its Operating Cash Flow was only ₹5,738 Crore barely above net profit. After CapEx, Free Cash Flow was roughly ₹4,500 Crore.​

The math looks okay. But here's the trap many investors miss: Asian Paints' net profit-to-FCF conversion is weaker than TCS or Maruti because it carries more working capital needs inventory sits in warehouses, and dealers take extended payment terms.

An analyst looking only at the ₹5,460 Crore profit might declare Asian Paints a growth story. An analyst tracking FCF asks: "How much of that profit is real cash I can use?"

The Hidden Warning Signs Analysts Watch Using Free Cash Flow (FCF)

Consultants and equity analysts rely on Free Cash Flow because it exposes problems before they show up in earnings. While profits can be shaped by accounting assumptions, cash is far harder to manipulate. This makes FCF an early-warning system for business quality and sustainability.

Red Flag #1: Rising Earnings but Falling FCFWhen profits are growing but free cash flow is shrinking, it usually means the company is struggling to convert accounting income into real cash. In practice, this often shows up as stretched receivables (customers taking longer to pay), excess inventory piling up, or aggressive revenue recognition. Over time, this gap weakens balance sheets and forces companies to rely on debt to fund day-to-day operations.

Red Flag #2: Exploding CapEx with Weak Cash GenerationHeavy capital expenditure is not always bad but when CapEx keeps rising simply to maintain reported growth, it becomes a warning sign. If earnings remain positive while free cash flow turns negative, it suggests the business model is becoming capital-hungry. In such cases, growth is being “bought” rather than earned, and returns on invested capital often start to deteriorate.

Red Flag #3: Operating Cash Flow Below Net IncomeWhen operating cash flow consistently trails net income, it raises serious questions about earnings quality. This gap can indicate aggressive accounting practices, one-time gains embedded in profits, or working capital stress. While it may not signal fraud, it does suggest that reported profits are not translating into cash that can be reinvested or returned to shareholders.

Green Flag: Consistent Free Cash Flow GrowthSustained FCF growth is one of the strongest indicators of a healthy business. It shows that the company is scaling efficiently, controlling working capital, and generating surplus cash after reinvestment. This surplus provides strategic flexibility funding expansion, reducing debt, paying dividends, or buying back shares without relying on external capital.

Earnings tell you how a company looks on paper. Free cash flow tells you how the business actually functions. When the two move in opposite directions, analysts pay attention because cash problems usually surface long before profit problems do.

Takeaway

When evaluating a company, ask yourself:

1. Is the FCF growing? If earnings grow but FCF stagnates, something is wrong.

2. What percentage of revenue becomes FCF? Apple: ~26%. Maruti: ~2.9%. TCS: ~19%. The higher, the healthier.​

3. Is CapEx reasonable or desperate? Does the company invest to maintain, or to chase growth it can't afford?

Free Cash Flow separates the stories from the numbers. It's the metric that tells you whether the company is truly healthy or simply dressed up for the quarterly report.