# Eps vs Fcf

_Systematic Investing . 2026-06-09 . By Tanmay Kurtkoti. Educational, illustrative, not advice._

A friend texted me a screenshot last week. A midcap whose earnings per share had grown roughly thirty percent two years running. Looks like a compounder, he said. Why am I not in this.

So I pulled the cash flow statement. The free cash flow had not moved. Two years of earnings nearly doubling, and the actual cash the business threw off was flat.

Here is the part that trips people up. Earnings is not cash. A company can report a higher profit on the back of things that have not turned into money yet. A sale recognised in the quarter even though the customer pays next year. Inventory building up and sitting on the balance sheet as an asset. Costs that get capitalised, parked on the balance sheet and amortised slowly, instead of being run through the profit line now. Every one of those lifts reported earnings without a rupee changing hands.

The distance between profit and cash has a name. Accruals. Richard Sloan published the foundational work on it back in 1996, and the finding has been chewed over and confirmed many times since, including in the big earnings-quality survey by Dechow, Ge and Schrand in 2010. Companies where reported profit runs well ahead of cash tend to disappoint later. The cash was telling the truth first.

Run the illustrative version. Earnings per share goes from 10 to 13 to roughly 17 over three years. Free cash flow per share sits at 9, then 9, then 9. The conversion ratio, free cash flow divided by earnings, slides from 0.90 to 0.71 to 0.53. The headline says the business is compounding. The conversion ratio says recognition is running ahead of collection.

One quarter of this is timing. A delayed payment, a one-off build, nothing to see. Three quarters in a row is a trend, and that is the bar. The slope of the conversion ratio is the early warning, long before it reaches the headline number everyone watches.

Earnings is the number management reports. Free cash flow is the number the business actually generated. When they grow apart for three quarters running, believe the cash.

How to read a cash flow statement like a quant, in plain English: https://rupeecase.com/learn/

(Illustrative figures, educational only. Not investment advice.)