A practical one-line fix for anyone using the operating-cash-flow-minus-capex shortcut: subtract purchase of intangible assets as well, since it is the same economic outflow wearing a different label, and the trick described here disappears. A second quick test that needs no judgement calls: compare capitalised software additions with the amortisation charge over a few years. When additions run persistently ahead of amortisation, reported profit is running ahead of the cash economics by roughly that difference, and you have measured the dependency this post warns about without guessing anyone's motives. The distinction worth keeping is that capitalisation itself is legitimate matching; the red flag is profitability that exists only because of it.
A practical one-line fix for anyone using the operating-cash-flow-minus-capex shortcut: subtract purchase of intangible assets as well, since it is the same economic outflow wearing a different label, and the trick described here disappears. A second quick test that needs no judgement calls: compare capitalised software additions with the amortisation charge over a few years. When additions run persistently ahead of amortisation, reported profit is running ahead of the cash economics by roughly that difference, and you have measured the dependency this post warns about without guessing anyone's motives. The distinction worth keeping is that capitalisation itself is legitimate matching; the red flag is profitability that exists only because of it.
Exactly!