The Games People Play With Cash Flow

I feel slightly embarrassed talking about this, since cashflow and EBITDA are such basic business concepts. They’re also terribly boring, I think, if they’re taken on their own.

I think a good way into the topic (that isn’t 100% tedious) is to read The Outsiders and see if you enjoy the capital allocation lens that Thorndike talks about. (For a shorter overview, I recommend this podcast episode with Thorndike.)

As you read, Google for each of the financial metrics that are used in the book. Investopedia is usually a good source of information here.

Then, to get a better feel for what these metrics tell you about a business, I’d recommend reading business biographies while asking the following questions:

  • What are the cash flow characteristics of this business?
  • You can only raise capital through equity, debt, and retained earnings, (or a combination of all three), which combination did this business grow with?
  • How were the earnings allocated over the history of the company?

You can actually apply this to just about every business biography you read. For instance, I learnt a great deal applying it to:

  • Shoedog (Nike)
  • Kochland (Koch Industries)
  • Barbarians at the Gate (RJR Nabisco — and the rise of junk bonds and private equity)
  • Titan: The Life of John D. Rockefeller, Sr. (Standard Oil — although since this story happened in the late 1800s/early 1900s, the bond markets were more developed than the equity markets of the time, so Rockefeller didn’t really have access to equity as a form of capital!)

Books are incredibly time consuming, though. Here’s an alternative hack: subscribe to the Acquired podcast and work your way through their backlog!

The first half of each episode is ‘story of the company’ (which is incredibly entertaining), and the second half ‘financial analysis of the company’. Both hosts have tech + finance backgrounds, and they just assume you understand the financial terms that they throw around. This is a really quick way to pick up on the finance worldview.

My favourite episodes: SpaceX, the NBA, and ARM.