Glossary

Accruals

The part of reported profit that has not arrived as cash yet.

Accrual accounting records revenue when it is earned and costs when they are incurred, not when cash moves. The gap between net income and operating cash flow is the accruals.

Some accruals are normal: a growing company carries more unpaid invoices. But profits made mostly of accruals tend to be less durable than profits backed by cash.

Watch for profits that rise while operating cash flow does not.

  • Free cash flow: The cash a business produces from its operations after paying for the investment it needs to keep going.
  • Value trap: A stock that looks cheap but stays cheap, or gets cheaper, because the business is declining.

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