The Myth:
Accrual-based net income shows the company’s cash-generating ability.

The Reality:
Accrual accounting records revenue when earned and expenses when incurred, not necessarily when cash moves. A business can show strong accrual profits while suffering from cash shortages due to unpaid receivables, rising payables, or heavy CapEx needs.

Why It Matters:
Valuation relies on sustainable free cash flow — not just net income. If you ignore cash flow reality, you risk overvaluing a business.

Practical Tip:
Always adjust for working capital changes, CapEx, and non-cash items when estimating real cash flow.