Mauro Valadim | A Practical Way to Read Free Cash Flow

Mauro Valadim — Wed, 14 Oct 2026 09:56:05 +0000

Free cash flow is often used as a quick summary of how much cash a business has after investment. It is useful, but the figure needs context. A decline can result from weaker operations, higher working-capital needs or planned capital expenditure.

I start by separating the cash flow statement into two questions: how much cash did operations generate, and what did the business spend to maintain or expand its capacity?
Maintenance and expansion
Maintenance spending supports existing operations. It may cover equipment replacement, facility upkeep or system upgrades. Expansion spending is intended to add capacity, distribution or products. Companies do not always report these categories separately, so the distinction often requires reading project descriptions and management commentary.
The classification is not a promise of future returns. It is a way to understand the purpose of the cash outlay.
Check operating cash flow first
Before focusing on capital expenditure, I review operating cash flow. Receivables, inventory and supplier payments can change the cash available for investment, even when reported earnings are stable.
A business that grows may need more cash to fund inventory or customer credit before it collects payment. That can be part of normal operations, but it changes the amount of cash left after investment.
Follow the pattern
A single period can be affected by timing. Seasonal businesses may build inventory before a busy period, while a large project can create temporary spending. I compare several periods and look for evidence that the company’s explanation fits the subsequent pattern.
I also consider whether delayed maintenance is making free cash flow look temporarily stronger. Cutting necessary spending can preserve cash now while leaving future operating needs unresolved.
The useful question is not whether free cash flow went up or down. It is what drove the change, what the spending supports and whether cash generation remains consistent with the business’s operating requirements.

Mauro Valadim | A Practical Framework for Testing Revenue Growth

Mauro Valadim — Thu, 08 Oct 2026 11:57:50 +0000

Revenue growth is useful, but it should never be examined alone. A company can increase sales while weakening its margins, absorbing more working capital or producing less cash. The headline may look stronger even as the economics become less attractive.

I use a straightforward sequence when reviewing growth.

Identify the source Revenue can increase through higher unit volume, price changes, acquisitions, favorable currency movements or changes in revenue recognition. Each source carries a different level of durability. Volume growth supported by repeat demand may be more informative than a temporary price increase. Acquisition-driven growth can be valuable, but it also requires an assessment of integration costs, financing and returns on invested capital.
Compare growth with margins The next step is to determine whether additional revenue is improving operating leverage. If sales rise while margins contract, I examine labor, input costs, distribution expenses and customer-acquisition spending. Temporary pressure may be reasonable when a company is funding productive expansion. Persistent pressure without improving returns is a different matter.
Examine working capital Receivables and inventory often reveal details that the income statement does not. When receivables grow faster than revenue, customers may be paying more slowly or the company may be using generous credit terms to support sales. Rapid inventory growth may indicate preparation for future demand, but it can also signal weaker sell-through. Neither movement proves that something is wrong. Both require an explanation.
Follow the cash Operating cash flow helps test whether accounting earnings are converting into usable capital. A short-term gap can result from timing, but a repeated gap deserves closer attention. I also distinguish maintenance capital expenditure from growth investment. Both reduce current free cash flow, yet they have different implications for the future economics of the business.
Check the expectations in the price Even durable growth has a price. If valuation already assumes high margins, uninterrupted expansion and flawless execution, a strong company may offer little room for disappointment. The purpose of this framework is not to distrust every positive revenue figure. It is to determine what created the growth, what it required and whether it improved the underlying business.

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Mauro Valadim | A Practical Way to Read Free Cash Flow

Mauro Valadim | A Practical Framework for Testing Revenue Growth