Where a company's money actually is

The income statement says whether a company made money. It doesn't say whether that money exists. A company can post rising profits for three years and move closer to bankruptcy at the same time — not by cheating, but through how a growing business works.

What earnings per share measures and how buybacks lift it

Earnings per share splits total profit across the number of shares that exist. It's the market's most quoted metric, and also one of the easiest to improve without earning an extra euro.

How it's calculated

Net income divided by shares outstanding. If a company earns €100 million and has 100 million shares, its earnings per share is €1.

It's the number the analyst consensus we covered in the earnings chapter gets measured against, which is why it moves the price.

The mechanism that lifts it without selling more

That same company, with the same €100 million profit, runs a share buyback: it buys 20% of its own shares on the market and cancels them. It goes from 100 to 80 million shares.

Total profit hasn't changed by a cent. Earnings per share rises to €1.25, up 25%.

The image that explains it: the cake is exactly the same, but now it's cut into fewer slices, so each slice is bigger.

When it's legitimate and when it's dressing up

Buying back shares isn't a trick. It's one of the two ways a company returns money to shareholders — the other is a dividend — and it makes sense when the company generates more cash than it can reinvest well.

It becomes a problem when earnings-per-share growth comes only from there. A company whose total profit has been flat for three years while its earnings per share rises 8% a year is buying the appearance of growth.

The check takes thirty seconds: compare earnings-per-share growth against total profit growth. If the first runs well ahead, the difference is arithmetic, not business.

And there's a second, less obvious check: what money is doing the buying. A company buying back with generated cash is returning surplus. One taking on debt to buy back is swapping debt for appearance, and that shows on the balance sheet.

What the balance sheet shows that the income statement doesn't

The balance sheet is a snapshot of the period's last day: what the company owns and what it owes. It doesn't say what happened, it says what state things ended in.

The three parts

Assets: everything the company owns. Cash, stock in the warehouse, invoices pending collection, factories, machinery, brands.

Liabilities: everything it owes. Loans, bonds issued, supplier invoices pending payment.

Equity: the two subtracted. What would be left for shareholders if everything were liquidated and every debt paid. It's the residual claim from the course's first chapter, seen from the accounting side.

What only shows up here

A company with excellent profits can have a worrying balance sheet, and the income statement doesn't reveal it.

Debt. The income statement only shows this year's interest. The balance sheet shows how much is owed in total and when it matures, which is a completely different question.

Available cash. How much money is actually in the bank right now.

How much of the assets are real and how much are accounting. Part of many companies' assets is goodwill: what they overpaid when buying other companies. It isn't a factory, it's a recorded expectation. When that expectation doesn't materialise, it has to be written down as a loss, and those write-downs appear all at once.

The ratio worth checking every time

Of all the balance sheet numbers, one summarises the debt situation better than any other: net debt to EBITDA (EBITDA: earnings before interest, taxes, depreciation, and amortisation).

It measures how many years the company would take to clear its debt devoting everything it generates to it. A ratio of 1 is comfortable, 3 is normal in many sectors, and above 4 or 5 starts being stretched depending on the type of business.

Remember from the session on what a stock is that Digi closed March 2026 with €646.4 million of debt, equal to 2.94 times its adjusted EBITDA. That "2.94 times" is exactly this ratio, and it's why the company itself highlighted it in its prospectus: it's the number an investor uses to judge whether the debt is under control.

Why the point in the cycle matters for debt

High debt isn't good or bad on its own. What decides is when it has to be repaid and at what interest rate, and that depends on the economic moment, not on the company.

Almost no large company repays its debt: it refinances it. When a bond matures, it issues another to pay it off. That works indefinitely as long as lenders exist and the rate is bearable.

The problem appears when both conditions change at once. A company that borrowed at 2% and has to refinance at 6% sees its interest bill triple without making any new decision.

Why this turns debt into a calendar risk

From which comes a question almost nobody asks and that's published in the accounts: when does this debt mature?

A company with high debt but maturities spread across ten years has room to manoeuvre. Another with the same debt concentrated in the next eighteen months depends on the credit market being open precisely then.

It's the same sequence-of-returns idea we saw applied to your own money in Chapter 2, applied to a company: it isn't only how much, it's when.

Which sectors suffer most when rates rise, and why, closes the next session.

Why growth consumes cash

Here's the mechanism explaining most of the gap between profit and real money, and one almost no material for individual investors explains properly.

Picture a shop doing well that decides to grow. To sell more it has to do two things before collecting anything:

Buy more stock. That money leaves the account today and comes back when it sells, weeks or months later.

Accept getting paid later. Winning larger customers means giving them terms: you deliver now and they pay in sixty or ninety days. The sale is recorded today and the money arrives in March.

Meanwhile, payroll and suppliers get paid on time.

Result: the income statement says the company is earning more than ever, and the bank account is emptier each month.

What this is called

The money trapped in that process is working capital: stock in the warehouse plus invoices pending collection, minus what you haven't yet paid your own suppliers.

And it has a mechanical relationship with cash: when working capital rises, cash falls. Every extra euro put into inventory or receivables is a euro not sitting in the bank.

The faster a company grows, the more working capital it needs. That's why growth, which sounds unambiguously good, is one of the most frequent causes of financial suffocation in companies that are doing well.

What to check in practice

Two signals that appear in the accounts and read without being an accountant:

Inventory growing faster than sales. If the warehouse grows 30% and sales grow 8%, product is piling up unsold.

Receivables growing faster than sales. If invoices pending collection grow much faster than revenue, either customers are paying later, or the company is selling to customers who pay worse.

Both are among the earliest warnings of a problem, and neither appears in an earnings headline.

What free cash flow is and why it's harder to disguise

Free cash flow measures the money genuinely left after keeping the business running. It's the hardest figure in the accounts to dress up, because cash is either in the bank or it isn't.

First: the cash flow statement has three parts, worth distinguishing

The third document from the previous session splits into three blocks, and knowing which one each euro comes from changes the reading entirely.

Block	Where the money comes from	What positive means
Operating	From selling what the company sells	The business generates cash by itself. This is the good one
Investing	From buying or selling assets	Usually negative: the company is investing. Positive can mean it's selling things off
Financing	From borrowing, issuing shares, paying dividends	Positive means money is coming in from outside, not from the business

The distinction matters because a company can increase its cash without the business having improved at all: taking a loan or selling a building does it. Both raise the bank balance and neither says the business is doing better.

When someone says "this company generates a lot of cash," the right question is which of the three blocks. Only the first speaks about the business.

How you get to free cash flow

You start from profit and make three adjustments:

Add back depreciation. It's an expense that reduces profit but from which no money leaves: it's the accounting spread of something already bought years ago. Since it isn't a real cash outflow, it gets added back.

Subtract or add the change in working capital. What we just saw: if working capital grew, that money is trapped and gets subtracted.

Subtract investment in assets. What the company spends maintaining and expanding factories, stores, or technology. That money genuinely leaves.

What's left after the three adjustments is what the company can use freely: pay a dividend, buy back shares, repay debt, or hold.

From profit to free cash flowStatement of cash flows

Operating

Where the money comes fromFrom selling what the company sells

What a positive figure meansThe business generates cash on its own. This is the good one

Investing

Where the money comes fromFrom buying or selling assets

What a positive figure meansUsually negative: the company is investing. Positive may mean it is selling things off

Financing

Where the money comes fromFrom borrowing, issuing shares, paying dividends

What a positive figure meansPositive means money is coming in from outside, not from the business

Net income+Depreciation−Working capital change−Capex=Free cash flow

Start from profit and make three adjustments. First, add back depreciation.

It is an expense that reduces profit but moves no money: it is the accounting spread of the cost of something bought years ago. Since no cash actually leaves, it is added back.

Why it's more honest than profit

Accounting profit includes decisions with interpretive latitude: how many years an asset is depreciated over, when revenue is recognised, what counts as extraordinary. All within the law, and all with some room.

Free cash flow is calculated on real money movements. There's no interpreting whether a euro landed in the bank.

The divergence to watch

If a company reports €1,000 million in profit and generates €400 million in free cash flow, that €600 million gap is somewhere specific, and the accounts say where: working capital that grew, very high investment, or profits that weren't cash.

A one-off gap can be normal. Profit rising and free cash flow falling, sustained over several quarters, is one of the most reliable warning signals that exists in analysing a company.

And it's exactly the kind of pattern that doesn't fit in an earnings headline, because it requires looking at two documents at once and comparing them against previous quarters.

What to remember

• Earnings per share rises when a company buys back shares, even earning exactly the same: always compare its growth against total profit growth.
• The balance sheet shows debt and its maturity, which the income statement doesn't; net debt to EBITDA summarises it in one number.
• Growth consumes cash because you have to buy stock and wait for payment before taking anything in.
• Profit rising with free cash flow falling, several quarters running, is among the most reliable warning signals there is.

Related: how to read an income statement · the dividend, start to finish · how to read a full event