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Comment by JCM9 | Hacker News Reader

Good article although especially in tech it’s not so simple. Thanks to games with depreciation and other financial engineering a company may look “profitable” but still be quite unhealthy or at risk. One generally needs to look at “profit” in the context of cash flow.

I.e. a company could be “profitable” but also basically broke at the same time with no cash to pay people or suppliers.

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Also, "tech" and "AI" are not markets. A software provider that provides let's say CRM software may have very different operating margins than Tesla (automobiles), a hardware manufacturer (TSMC), a chip designer (NVIDIA), or a media company (Facebook). Yet these are all "tech" and "ai".

Many lenses. I do like the authors focus on one. But you’re right it doesn’t tell the whole story.

Op margins are a great way to think about where one might see mean reversion, which then flows to net.

Ie are there structural reasons for the op income or is it a maturing sector which will attract new entrants.

It skews the other way just as often in my experience. That large clump at 10% has some wildly profitable businesses in it.

The comment you are responding to was "profitable but no cash flow" (due to non-cash deductions). I'm not clear what you mean by "the other way".

If you were "profitable but no cash flow" then you must have non-cash additions to your profit, not deductions.

A classic example of 'profit but no cashflow' might be where you made a profit but spent a lot of money on stock that you haven't sold yet. Or you made a lot of sales that you are yet to be paid for.

In the PE world it is just as likely that you made a profit before interest and tax, but you paid it all in interest. You would then have an operating profit but no cashflow due to a cash item. It could still make it a good business to own, if you didn't need the debt, or wanted to have the interest paid to you.

Maybe you made a profit but paid it all in dividends to a holding company. Then you have a profit but no cash flow due to cash items that don't affect the p&l.

You're right about non-cash additions. I was confusing this with an enterprise showing a loss (especially for tax purposes) despite a positive cash flow. The classic example would be residential real estate, where depreciation can cause a net loss despite the landlord receiving enough rent to pay mortgage/property tax/maintenance. This is why in the U.S. there are rules that limit current deductions on the tax return for passive losses.

So I would think the "other way" from profitable/no cash flow is loss/with cash flow.

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