Northline Instruments: one year, three stories
Northline Instruments makes industrial equipment, and it is entirely fictional. Its finance director opens the year-end pack with three sentences: EBITDA is $200m, cash flow after capex is negative, and the bank balance nearly doubled. All three are true. Your job is to explain how, with all three lenses and the reflex this stage trains: what is the evidence?
All amounts are $m for one year, with simplified US GAAP-style statements. COGS and other cash operating costs exclude D&A. Assume all tax expense is current and paid; there are no FX, acquisition or other noncash working-capital changes. Try each calculation before reading the interpretation.
| Income statement | Current year |
|---|---|
| Revenue | 1,200 |
| COGS excluding D&A | (720) |
| Other operating costs excluding D&A | (300) |
| D&A | (60) |
| Operating income | 120 |
| Nonoperating gain on land sale | 20 |
| Interest expense | (30) |
| Income tax expense | (27.5) |
| Net income | 82.5 |
| Balance sheet | Opening | Closing |
|---|---|---|
| Cash | 80 | 157.5 |
| Receivables | 180 | 210 |
| Inventory | 140 | 160 |
| Net PP&E | 400 | 440 |
| Land held outside operations | 40 | 0 |
| Total assets | 840 | 967.5 |
| Trade payables | 100 | 115 |
| Debt | 300 | 350 |
| Equity | 440 | 502.5 |
Additional evidence: cash capex is $100m, land sold for $60m, net new borrowing is $50m and cash dividends are $20m. There are no other movements.
The Scorecard: from net income up to EBITDA
Work upward from the bottom line of the Scorecard (income statement). EBIT is net income plus tax plus interest: 82.5 + 27.5 + 30 = $140m. Add back $60m of D&A and EBITDA is 140 + 60 = $200m. But that $140m includes a $20m gain on land that Northline sold, and selling land is not what an equipment maker does for a living. Remove the land gain and the operating EBITDA-like view is $180m. Reported EBITDA is a fact; the operating view is the forecasting base.
The Cash Ledger: from net income to operating cash
Now walk from net income to the Cash Ledger (cash flow statement). Add back the $60m of D&A, which never left the bank. The land proceeds belong in investing, not in operations, so the $20m gain comes out here and the $60m of cash appears further down. Then charge the working capital that grew: receivables rose 210 − 180 = 30, inventory rose 160 − 140 = 20, and payables rose 115 − 100 = 15, so operating working capital absorbed 30 + 20 − 15 = $35m. Operating cash flow is 82.5 + 60 − 20 − 35 = $87.5m.
Capex of $100m turns $87.5m of operating cash into −$12.5m after investment. Investing cash flow is −100 + 60 = −$40m once the land proceeds arrive. Financing cash flow is 50 − 20 = $30m. Cash rises 87.5 − 40 + 30 = $77.5m, from 80 to 157.5. The Snapshot (balance sheet) agrees: equity rolls forward 440 + 82.5 − 20 = 502.5, and total assets of 967.5 equal claims of 115 + 350 + 502.5. The three statements reconcile, which proves the arithmetic and nothing else.
Northline's operating cash flow is $87.5m and capex is $100m, yet cash rose by $77.5m. What explains the rise?