Profit growth that has not become operating cash
Series XV case study · set 1, case 1 of 5 · 4 questions · 1 mark each
Question 1 of 4Case practice
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Aster Components reports annual revenue of ₹500 crore, cost of goods sold ₹300 crore, other cash operating expenses ₹100 crore and depreciation ₹20 crore. Interest expense is ₹10 crore. For this fictional exercise, tax equals 30% of profit before tax and is paid in cash in the same year. Inventory rises by ₹30 crore, receivables rise by ₹40 crore and operating payables rise by ₹10 crore. There are no other working-capital movements or non-cash adjustments. Use the indirect operating-cash-flow calculation starting with net profit, adding depreciation and subtracting the net operating working-capital increase. Do not treat borrowing proceeds as operating income.
All people, firms, prices and contract terms are fictional.
Ignore taxes and transaction costs unless the case explicitly includes them.
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The case and its answers
Every question of this case, with its answer and why each other option is wrong.
Aster Components reports annual revenue of ₹500 crore, cost of goods sold ₹300 crore, other cash operating expenses ₹100 crore and depreciation ₹20 crore. Interest expense is ₹10 crore. For this fictional exercise, tax equals 30% of profit before tax and is paid in cash in the same year. Inventory rises by ₹30 crore, receivables rise by ₹40 crore and operating payables rise by ₹10 crore. There are no other working-capital movements or non-cash adjustments. Use the indirect operating-cash-flow calculation starting with net profit, adding depreciation and subtracting the net operating working-capital increase. Do not treat borrowing proceeds as operating income.
All people, firms, prices and contract terms are fictional.
Ignore taxes and transaction costs unless the case explicitly includes them.
Q1What is EBITDA margin?
Option A. 40%
Why it is wrong: This is gross margin before other operating expenses.
Option B. 16%
Why it is wrong: This is EBIT margin after depreciation.
Option C. 20% — Correct answer
Option D. 14%
Why it is wrong: This is the profit-before-tax margin.
Answer: C. EBITDA = ₹500 − ₹300 − ₹100 = ₹100 crore. Margin = ₹100/₹500 × 100 = 20%. Remember: Define a profitability measure before comparing margins.
Hint, shown before you answer in practice mode: Calculate operating profit before depreciation, then divide by revenue.
XV-S1-C01-Q1easynumerical
Q2What is net profit after the stated tax?
Option A. ₹49 crore — Correct answer
Option B. ₹30 crore
Why it is wrong: This is not the tax or profit produced by the stated income statement.
Option C. ₹70 crore
Why it is wrong: This is profit before tax.
Option D. ₹56 crore
Why it is wrong: This applies tax to EBIT without deducting interest.
Answer: A. Profit before tax = 500 − 300 − 100 − 20 − 10 = ₹70 crore. Net profit = ₹70 × 70% = ₹49 crore. Remember: The income-statement sequence matters for after-tax profit.
Hint, shown before you answer in practice mode: Deduct depreciation and interest before the hypothetical tax.
XV-S1-C01-Q2mediumnumerical
Q3What operating cash flow follows the stated indirect-method assumptions?
Option A. ₹9 crore — Correct answer
Option B. ₹129 crore
Why it is wrong: This adds the working-capital use instead of subtracting it.
Option C. ₹69 crore
Why it is wrong: This ignores the working-capital increase.
Option D. −₹11 crore
Why it is wrong: This omits the depreciation add-back.
Answer: A. Working-capital increase = ₹30 + ₹40 − ₹10 = ₹60 crore. Operating cash = ₹49 + ₹20 − ₹60 = ₹9 crore. Remember: Accounting profit can be absorbed by growing operating working capital.
Hint, shown before you answer in practice mode: Net working-capital use is inventory plus receivables minus payables growth.
XV-S1-C01-Q3hardnumerical
Q4Which investigation is most directly suggested by the large receivables increase?
Option A. Treat the receivables increase as new equity capital.
Why it is wrong: It is an operating asset movement.
Option B. Check collection periods, overdue balances and the support for recorded sales. — Correct answer
Option C. Assume every receivable is cash already collected.
Why it is wrong: Receivables represent amounts still to be collected.
Option D. Conclude fraud is proven without further evidence.
Why it is wrong: A receivables increase is a review signal, not proof of fraud.
Answer: B. The ₹40 crore receivables increase ties up operating cash. Collection data and sales evidence help distinguish normal growth from deteriorating collection quality. Remember: Use financial ratios and cash-flow signals to direct evidence-based investigation.
Hint, shown before you answer in practice mode: Focus on why recognised revenue has not yet turned into cash.
XV-S1-C01-Q4mediumapplication
From enterprise value to equity value
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