Analysing the cash flow statement

Profit is an opinion; cash is a fact. The cash flow statement shows whether earnings turn into cash, what the company spends on investment, and how it funds any gap — with savings, new debt or new equity.

Rawdah reports cash from operations (CFO) with the indirect method: start from net income, add back non-cash charges such as D&A, and adjust for working capital. On the statement, an increase in an asset like receivables or inventory appears as a negative number (cash absorbed); an increase in payables appears as a positive number (cash retained).

Read it as a funding story. Take the three sections in order. Operations should be the main source of cash; investing shows what the company spends to stay in business and to grow; financing shows who covers any gap, and who receives any surplus. Over the three years together, Rawdah generated free cash flow of SAR 61.5m and paid dividends of SAR 133.0m: it paid out SAR 71.5m more than it generated, and borrowed SAR 95.0m of new debt to do it. A pattern like that can last only as long as lenders are willing.

Interpreting negative free cash flow. It isn't automatically bad. A company opening stores that will earn well above its cost of capital may rightly spend more than it generates for a while. So split capex into maintenance (roughly D&A, keeping the existing estate going) and growth, and ask whether operating cash covers at least the maintenance part. Rawdah's FY2025 capex was 2.0x its D&A, so much of it is growth, but its CFO fell even before that investment: the drain is working capital, not the store programme.

Limits. Classification choices move numbers between sections: under IFRS, interest and dividends paid can be shown in operating or financing activities, so check before comparing CFO across companies. The next lesson uses the gap between profit and operating cash to judge earnings quality.