The basic level of the certification taught you that profit and cash are not the same thing. A Senior Analyst builds their entire way of working on that insight: they read a company through cash flows and capital efficiency - quantities that are much harder to dress up than accounting profit. This view separates average businesses from great ones more reliably than anything in the income statement.
FCF yield: the return from free cash
You already know free cash flow (FCF): operating cash flow minus capital expenditures. FCF yield puts it in proportion to the price of the whole company: FCF divided by market capitalization. A company with a market cap of 100 billion and annual FCF of 5 billion has an FCF yield of 5% - that is the percentage of its market value it actually earns each year in money it can pay out, invest or use for buybacks.
Analysts like FCF yield for a simple reason: profit can be adjusted, cash much less so. When P/E and the price-to-FCF ratio diverge sharply, something is stuck between profit and money - high capex, swelling receivables, or generous stock-based compensation. That gap is always a reason for a question, never for ignoring it.
Capex: light and heavy businesses
Capex intensity - capital expenditures divided by revenue - quickly separates a capital-light business from a heavy one. A software company invests single-digit percentages of revenue in fixed assets, an airline or a steel mill tens. That is why capital-light companies trade at higher multiples: out of every dollar of revenue, more free cash is left for shareholders after investments.
An analyst additionally separates maintenance capex (investment needed to keep current operations running) from growth capex (investment in expansion). A company with high capex that all flows into growth with good returns is a healthy story. A company that needs high investment just to stay in place is in fact paying dearly for its "profit" every year.
A useful warning signal comes from comparing capex with depreciation. Depreciation roughly says how fast the existing assets are wearing out - and a company whose investment runs persistently below depreciation is putting back less than the business is losing. Short term this inflates free cash flow; long term it is underinvestment that the business will one day collect on.
Working capital: where cash goes missing
The most common answer to why a profitable company has no money is: working capital. When receivables grow faster than revenue, the company is selling but customers are not paying - the profit is on paper, the cash nowhere. When inventory grows faster than revenue, cash sits in the warehouse and part of it risks turning into write-downs. Both movements drain operating cash flow without touching the income statement at all.
A quick test is cash conversion: the ratio of operating cash flow to net income. A value persistently well below 100% says accounting profit is not converting into money - and it is worth finding out why before the market does.
Working capital is also measured in days - by the cash conversion cycle: inventory days plus receivable days minus payable days. The result says how many days the money stays tied up in operations before returning to the account. Do not confuse it with the cash conversion ratio from the previous paragraph - the same phrase, two different metrics: the ratio measures profit turning into money, the cycle measures days.
The cycle can even be negative - which is a strength, not a flaw. A company that collects from customers immediately but pays its suppliers on delayed terms finances its operations with other people's money: the faster it grows, the more cash the growth generates. Supermarkets and e-commerce are the classic examples. And because inventory, receivables and payables shift through the year, quarterly cash flow is seasonal - a single quarter says little about a company; judge FCF over the full year.
Debt in ratios: net debt/EBITDA and interest coverage
The absolute amount of debt says nothing by itself - what matters is its proportion to earning power. The standard is net debt/EBITDA: net debt (debt minus cash) divided by EBITDA. A company with debt of 60 billion, cash of 10 billion and EBITDA of 25 billion has a ratio of (60 - 10) / 25 = 2. As a rule of thumb: values around 1 are conservative, 2 to 3 common, and well above 3 already requires a very stable business - and beware of the classic mistake of forgetting to subtract the cash.
The second view is interest coverage: operating profit divided by interest costs. EBIT of 40 billion against interest of 8 billion means coverage of 5x - the company earns its interest five times over. Debt also comes with refinancing risk: bonds are not repaid gradually but at maturities. When a large tranche matures in a period of high rates or frozen markets, even a company that had paid without hesitation until then can run into trouble.
One caution on ratios built on EBITDA: EBITDA is not cash flow. Depreciation is indeed non-cash, but interest, taxes and working capital movements are real money - and EBITDA ignores them all. There is therefore often a gulf between EBITDA and operating cash flow, and the wider it is, the more carefully debt ratios must be read.
The structure of the debt matters too: a fixed rate is locked until maturity, a floating rate reprices continuously - when the central bank raises rates, the interest costs of floating debt rise immediately, with no waiting for refinancing. And beware the debt-funded buyback: debt rises, equity falls with the repurchase, and the company is riskier even though nothing in the business changed at all - only the balance sheet was rebuilt.
Debt also comes with covenants - contractual conditions of loans and bonds, typically a net debt/EBITDA ceiling or a minimum interest coverage. Breaching them hands creditors leverage: the right to accelerate the debt, make it more expensive, or ban dividends and buybacks. A company hovering right at its covenants therefore loses room to maneuver at exactly the moment it needs it most.
The balance sheet's quiet signals
Two signals that are easy to miss. A goodwill impairment: when a company admits an acquisition is not earning what it expected, it writes off part of the goodwill. It costs no cash - the money left at the time of the purchase - but it speaks to the discipline with which management spends shareholders' capital; the Expert Analyst level covers goodwill in depth. And idle cash: a reserve is a virtue, but billions earning practically nothing lower the return on invested capital - capital that earns nothing dilutes ROIC just like a bad investment.
SBC and negative FCF
Stock-based compensation (SBC) does not hurt at first glance - no cash flows out. Yet newly issued shares dilute your stake exactly as if the company had paid employees in money and replenished the missing cash with a share offering. Demanding analysts therefore subtract SBC from reported FCF, especially at technology companies, where it routinely amounts to significant percentages of revenue.
And what about negative FCF? At a fast-growing company it need not be a problem - if the cash is flowing into growth investments with high returns and financing is secured, the company is merely exchanging today's money for a bigger future business. The problem is negative FCF without growth, because then the company is simply burning money. As always: a number without context is just a number.
Test yourself
Cash flow and capital efficiency are one of the six areas of the Senior Analyst exam - the second level of the Bulios certification. The entire certification program is a privilege of Bulios Black membership: by passing the test you prove that you judge companies through money, not through stories.