Cash Flow vs Net Income | Key Differences & Top Examples

Cash flow refers to the net cash generated by the company during the specified period of time and it is calculated by subtracting the total value of the cash outflow from the total value of the cash inflow, whereas, net Income refers to earnings of the business which is earned during the period after considering all the expenses incurred by the company during that period.

Differences Between Cash Flow and Net Income

Amazon’s Net Income is at $2.37 billion whereas, its Cash Flow from Operations is at $16.44 billion. Why is there 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 can we 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.

cash flow vs net income

In this article, we will talk about the following –

What are Cash Flows?

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

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

But if we look from the point of view of the 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. The 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 the 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 statements 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

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

Amazon - Cash Flow

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 compensationsStock-based CompensationsStock-based compensation also called share-based compensation refers to the rewards given by the company to its employees by way of giving them the equity ownership rights in the company with the motive of aligning the interest of the management, shareholders and the employees of the company.read more are added back. Likewise, changes in operating assets and liabilities like Inventories, accounts receivablesAccounts ReceivablesAccounts receivables refer to the amount due on the customers for the credit sales of the products or services made by the company to them. It appears as a current asset in the corporate balance sheet.read more, accounts payablesAccounts PayablesAccounts payable is the amount due by a business to its suppliers or vendors for the purchase of products or services. It is categorized as current liabilities on the balance sheet and must be satisfied within an accounting period.read more, and others.

You can learn Cash Flow Statements comprehensively from the following –

Net Income format and example

As you can see that in order to calculate 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 the 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 in the first place.

Format

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

Particulars Amount
Revenue *****
Cost of Goods SoldCost Of Goods SoldThe cost of goods sold (COGS) is the cumulative total of direct costs incurred for the goods or services sold, including direct expenses like raw material, direct labour cost and other direct costs. However, it excludes all the indirect expenses incurred by the company.read more (*****)
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.

Amazon - Net Income

source: Amazon SEC Filings

Now, if, as an investor, you need to set up a cash flow statement under the 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.

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.

Positive cash flow vs Positive net income

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 Positive 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.

Negative cash flow vs Negative net income

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 a 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

Positive Cash Flow and Negative Net Income

See below Pearsons Cash Flow from Operations and Net Income. Pearsons Net Income is negative. However, its Cash Flow is positive. Why?

Postive cash flow vs Negative net income

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.

Pearson - Postive cash flow vs Negative net income

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 –

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?

Negative cash flow vs Positive net income

source: ycharts

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

Netflix - Negative cash flow vs Positive net income

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 –

Cash Flow vs. Net Income Video

Recommended Articles

This has been a guide to Cash flow vs Net Income. Here we discuss key differences between cash flow and net income with top examples like Apple, Snap Inc, Netflix, and Pearsons. You may also have a look at the following articles –