Think about a global consumer brand relying on outsourced manufacturing, a tech pioneer pouring billions into custom hardware R&D, and a healthcare organization navigating strict regulatory frameworks. Each company operates in a different environment, with a distinct capital structure and supply chain model. On paper, their financial statements can feel like they are written in different languages.

So, how do we cut through those operational differences to see how well management is actually using its capital?

To get a clear, unified view, we look beyond basic profit margins to Return on Invested Capital (ROIC) and its forward-looking partner, Return on Incremental Invested Capital (ROIIC).

Understanding the Metrics: Historical ROIC vs. Incremental ROIC

Standard profit margins tell you how much revenue stays in the building after paying operational expenses. But ROIC measures how efficiently a company turns all the capital provided by credit investors and shareholders into operating profit.

Where “NOPAT” is the net operating profit after tax for the period (say, one year) and “Average Invested Capital” is the book value of total shareholders equity and total net debt, averaged over the same period.

What is “Invested Capital”?

Invested Capital is the net operating assets a business needs to function day-to-day or the total pool of funding provided by investors and lenders to buy those assets.

You can look at it from two intuitive angles on the balance sheet:

• The Operating Angle: It is the Net Working Capital (current operating assets minus non-interest-bearing current liabilities like accounts payable) plus long-term operating assets like factories, equipment, software, and intangibles.

• The Financing Angle: It is the total sum of Interest-Bearing Debt plus Shareholders’ Equity, minus any excess cash and cash equivalents sitting on the balance sheet.

Why Do We Use the “Average”?

NOPAT is a flow metric earned across an entire fiscal year, so using a single point-in-time balance sheet number from year-end can distort the calculation. We use Average Invested Capital, the average of the beginning and ending capital balances for the year, so that our denominator accurately aligns with the timeframe over which the profit was generated. Because ROIC compares NOPAT to total average invested capital, it gives us a capital-structure neutral view of economic profitability.

Incremental ROIC (ROIIC): Measuring Fresh Capital

Historical ROIC looks backward, it blends legacy investments made ten years ago with decisions made last quarter. To answer the key investor question “what have you done for me lately?”, we need look at Return on Incremental Invested Capital (ROIIC). ROIIC isolates the return earned specifically on the most recent dollars deployed into new growth projects, R&D, or facility expansions.

As Warren Buffett famously observed, the best business to own is one that can continuously reinvest large amounts of incremental capital at very high rates of return.

Choosing the Right Lens: Core Capital Metrics Compared

At this point, you might be wondering - But what about ROE (Return on Equity)? And how do we know a good ROIC when we see one?

A “good” ROIC need to comfortably exceeds the company’s Weighted Average Cost of Capital (WACC). When a business earns more on its invested capital than the cost to raise that capital, it creates true economic profit.

On the surface, ROE seems like the most direct metric for equity investors because it focuses strictly on net income relative to shareholders’ equity. However, ROE has a major blind spot: it can be easily inflated simply by taking on heavy debt. A company with a skyrocketing ROE might not be operating more efficiently at all—it might just be taking on financial leverage.

That is why we look across all four metrics together to get a more complete picture.

Real-World Proof: How These Metrics Play Out in Practice

To see how capital efficiency transforms across industries, let’s look at the ROIC and ROIIC for for three distinct industry leaders: NVIDIA, Proctor & Gamble, and Intuitive Surgical. We’ll use the latest completed full fiscal year for each company.

1. NVIDIA (High-Growth Tech)

Step 1: Calculate NOPAT

• FY2025 (Year ended Jan 26, 2025):

  • Operating Income (EBIT): $81,453M

  • Effective Tax Rate: 13.3%

  • FY2025 NOPAT = $81,453 * (1 - 13.3%) = $70,620M

• FY2026 (Year ended Jan 25, 2026):

  • Operating Income (EBIT): $130,400M

  • Effective Tax Rate: ~13.0%

  • FY2026 NOPAT = 130,400 * (1 - 13.0%) = $113,448M

• Change in NOPAT (ΔNOPAT): $113,448 - $70,620 = $42,828M

Step 2: Calculate Invested Capital (Total Debt + Total Shareholders’ Equity – Cash & Short-Term Investments)

• FY2025 Balance Sheet (Jan 26, 2025):

  • Total Debt: $8,463M

  • Shareholders’ Equity: $79,363M

  • Less: Cash & Short-Term Investments: $43,210M

  • FY2025 Invested Capital = $8,463 + $79,363 - $43,210 = $44,616M

• FY2026 Balance Sheet (Jan 25, 2026):

  • Total Debt: $8,500M

  • Shareholders’ Equity: $157,300M

  • Less: Cash & Short-Term Investments: $62,556M

  • FY2026 Invested Capital = $8,500 + $157,300 - $62,556 = $103,244M

• Average Invested Capital (FY2026): ($44,616 + $103,244) / 2 = $73,930M

• Change in Invested Capital (ΔInvested Capital): $103,244 - $44,616 = $58,628M

Step 3: Calculate the Return Metrics

1. Historical ROIC (FY2026):

2. Incremental ROIC (ROIIC, FY2025-FY2026):

The Strategic Takeaway: Why can NVIDIA generate a 73% return on tens of billions of fresh capital? It comes down to two core strategic advantages:

1. The Fabless, Asset-Light Hardware Model: NVIDIA doesn’t build multi-billion-dollar silicon fabrication plants itself; it outsources heavy manufacturing to foundry partners like TSMC. This keeps its physical capital requirements relatively light compared to its revenue scale.

2. The Software Ecosystem Moat (CUDA): NVIDIA isn’t just selling chips—it sells a unified hardware and software platform. Developers built the entire modern AI stack on CUDA over two decades, creating massive switching costs and strong pricing power (gross margins above 70%).

When demand for AI infrastructure exploded, NVIDIA didn’t need to rebuild its asset base from scratch. It poured capital into R&D and supply commitments, and because its software moat protected its margins, nearly every new dollar of sales converted directly into operating profit (NOPAT). ecause fresh capital yields a 73.1% ROIIC against a ~9.5% cost of capital, new AI R&D investments generate extraordinary economic profit.

2. Proctor & Gamble (Consumer Staples)

• FY2024 (Period ended June 30, 2024): $18.5B Operating Income * (1 - 20.3%) = $14.78B NOPAT and $73.5B Invested Capital

• FY2025 (Period ended June 30, 2025): $20.5B Operating Income * (1 - 20.4%) = $16.3B NOPAT and $77.3B Avg Invested Capital

• Calculated Metrics: 21.6% Historical Average ROIC and 39.9% 1-Year ROIIC

• Strategic Takeaway: Mature consumer staples typically carry a low WACC (~6.5%) due to stable, defensive cash flows [16]. P&G’s 39.9% ROIIC demonstrates superior brand equity and reinvestment discipline: by directing capital toward premium product extensions (Tide Pods, Oral-B iO) and supply chain automation, management generates incremental returns 6x higher than its cost of capital.

3. Intuitive Surgical (Medical Robotics)

• FY2024 (Period ended Dec 2024): $2.35B Operating Income * (1 - 16.0%) = $1.97B NOPAT and $6.86B Avg Invested Capital

• FY2025 (Period ended Dec 2025): $2.95B Operating Income * (1 - 16.0%) = $2.48B NOPAT and $7.74B Avg Invested Capital

• Calculated Metrics: 33.9% Historical Average ROIC and 57.3% 1-Year ROIIC

• Strategic Takeaway: ISRG runs a classic zero-debt "razor-and-blades" business model. Selling each da Vinci robotic system locks in high-margin recurring revenue from specialized instruments, accessories, and software services. Because incremental capital generates a 57.3% ROIIC against an ~8.0% WACC, expanding its installed system base accelerates reinvestment returns at more than 7x its hurdle rate.

☕ Try this at home:

When you evaluate a company or plan your team’s budget, do you focus more on historical returns or the expected return on your next dollar spent?

If you’d like to test this framework on companies in your own portfolio or watchlist, try copying and pasting this prompt into your favorite AI tool:

Suggested AI Prompt: “You are a corporate finance analyst preparing an executive recommendation. Please calculate the 3-year historical ROIC, incremental ROIC (ROIIC), and Return on Equity (ROE) for [Insert Company A] and [Insert Company B] using their latest 10-K filings from Yahoo Finance or SEC.gov. Provide a step-by-step breakdown of NOPAT, Average Invested Capital, and total shareholder equity, and explain whether new growth capital is creating or diluting economic value relative to their cost of capital.”

© Katherine Dextraze, F Avenue Consulting, 2026

It’s June 2021 and Shaquille O’Neal — four-time NBA champion, platinum-certified rap artist, and beloved actor — is working on his fourth career as an entrepreneur and investor. His first special purpose acquisition company (SPAC), Forest Road Acquisition Corp, raised $300 million to fund a $2.9 billion three-way merger with the fitness platform Beachbody and Myx Fitness Holdings (now trading as BODI). His second SPAC, Forest Road Acquisition Corp. II, is pursuing a tech-media-telecom deal with three former Disney execs as advisors.

Just a few years ago, SPACs were all the rage. SPAC-evangelists pitched them as a democratized fast-track to the public markets, while early institutional investors treated them like a risk-free playground.

But how did this “free lunch” actually work, and why did the excitement dissolve so quickly?

What does a SPAC do?

In simple terms: pretty much nothing on its own.

It has no operations, no products, and no employees of its own. It exists for one reason: to act a placeholder on the stock exchange and raise a pile of cash from the public through an initial offering, and then find a real, private business to merge with. When the merger closes, that private company takes over the SPAC’s spot on the stock exchange, essentially going public through a back door. This means that private companies can get listed more quickly (3-6 months), with less financial and regulatory scrutiny, instead of the grueling 12-18 months timeline for traditional IPOs.

For investors, the process looks like this:

1. The Blank Check: The SPAC goes public, typically selling shares to investors at a standard price of $10.00 each.

2. The Waiting Room: All that cash is placed into a secure, interest-bearing trust account. It sits there untouched, buying safe government securities while the sponsors hunt for a business to buy.

3. The Choice: When the sponsors find a target company and propose a merger, the public shareholders get to vote. But they also get a crucial fallback: if they do not like the deal, they can redeem their shares and get their full $10.00 back, plus any accrued interest, straight from the trust.

The Redemption Loophole: Public Investors vs. Sponsors

The reason big institutional investors (sometimes called the “SPAC Mafia”) poured billions into these structures was a unique structural loophole. When a SPAC first goes public, investors buy “units” that package common stock with a fraction of a warrant (a right to buy more shares at $11.50 in the future).

If an institutional fund disagrees with a proposed merger, they can redeem their shares to get their $10.00 back with interest. However, they still get to keep those warrants for free. If the merged company’s stock spikes on retail hype, they can cash in those warrants for a tidy profit; if it crashes, they lose nothing because their principal is already safe in their pockets.

Meanwhile, the sponsors put up the initial risk capital to cover upfront expenses and get an automatic 20% equity stake (the “promote”) for putting the deal together. If the merger goes through, they realize massive gains even if the stock performs poorly post-merger.

This left long-term public shareholders to absorb all the dilution from the free warrants and sponsor promote, bearing the full brunt of the post-merger consequences.

Where SPACs got their start: from the 1980s to SPAC 4.0

SPACs are often talked about as a recent invention, but their roots go back decades:

• The 1980s “Blind Pools”: Early versions were often used to fund highly speculative ventures like oil and gas exploration. They were so frequently associated with retail fraud and penny-stock scams that the federal government ultimately stepped in with heavy regulations under Rule 419 to protect investors.

• The 1993 Modern Safeguards: To rebuild trust, David Nussbaum redesigned the structure in 1993, adding the trust account and the redemption right to give the vehicle institutional credibility.

• The SPAC 3.0 Mania (2020–2022): Fueled by low interest rates and pandemic-era market optimism, the sector exploded. At its peak in 2021, a record 613 SPAC IPOs raised over $162 billion. Suddenly, celebrities, athletes, and retail day-traders were all piling into blank-check deals.

• The SPAC 4.0 Era (2024–Present): Following widespread post-merger market collapses, the SEC introduced sweeping new regulations in January 2024. These rules eroded the safe-harbor protections that allowed sponsors to make wildly optimistic financial projections, forced prominent disclosures of dilution, and held target companies legally liable for disclosure errors. Today’s sobered market features longer search timelines, performance-tied sponsor payouts, and much higher revenue bars for target companies.

Have SPACs Delivered for Investors?

For the public investors who bought and held these stocks after the mergers, the performance has been remarkably painful. Even during the height of the bubble, SEC leadership warned that the actual financial returns did not match the marketing hype.

• A major study of SPACs that merged between July 2020 and December 2021 showed that their share prices plummeted to an average of just $3.85 by late 2022. That represents a 60%+ loss for anyone who chose not to redeem their shares.

• On average, post-merger SPACs underperformed traditional IPOs by 26%.

• High-profile companies that chose this route, like WeWork, ended up filing for bankruptcy.

Speculative, capital-intensive sectors were hit the hardest:

• Cannabis SPACs: Lost an average of 98% of their value.

• Electric Vehicle SPACs: Cratered by an average of 88%.

Shaq’s SPACs: The Fate of Forest Road I & II

The Reality Check for Shaq and Forest Road I (BODI)

Shaq’s first SPAC, which merged with Beachbody and Myx Fitness, is a textbook example of this wider market trend. On its first day of trading in June 2021, the stock traded at $25.00 per share. However, as the business struggled operationally, annual revenues slid from $880 million in 2020 down to $527 million by 2023.

By late 2023, the stock had fallen well below $1.00, forcing the company to execute a 1-for-50 reverse stock split to keep its listing. Today, the stock hovers around $7.03 per share, which is the equivalent of just $0.14 per share before the reverse split. In total, Forest Road I and BODI lost over $3 billion in market value.

To make matters worse, shareholders filed a class-action lawsuit in June 2024 alleging that the Forest Road sponsors rushed the transaction for their own financial gain while providing misleading disclosures to public investors.

The Fate of Shaq’s Second SPAC (FRXB)

While Forest Road I managed to close its deal, O’Neal’s second vehicle, FRXB, was not so fortunate.

In November 2022, FRXB announced a proposed reverse merger with HyperloopTT, valuing the high-speed transit startup at $600 million. But the operational mountain was simply too high to climb. HyperloopTT was trying to build a 300-mile vacuum-tube transportation system connecting Chicago, Cleveland, and Pittsburgh, delivering zero near-term revenue and requiring an estimated upfront cost of $25 to $30 billion.

With interest rates climbing and the public markets freezing up, raising that kind of capital became impossible. By February 2023, the merger was officially terminated. Because FRXB could not find another target before its regulatory window closed, the fund was liquidated and the remaining cash was returned to its investors.

The Tale of Two EV SPACs: How Lucid lived, while Fisker died.

The electric vehicle sector was the ultimate epicenter of the SPAC boom. Startups requiring billions of dollars to scale manufacturing used the fast-track listing process to bypass the hurdles of a traditional IPO. But as Fisker and Lucid Motors show, listing on an exchange does not solve a fundamental cash problem.

1. Lucid Motors: The Struggle of Capital Intensity

   Lucid Motors went public via the Churchill Capital Corp IV SPAC in July 2021 with massive expectations, aiming to compete directly in the premium EV market. However, soon after the IPO, the company faced a wall of production shortfalls, extreme cash burn, and supply chain bottlenecks. Lucid serves as a premier case study for why capital-heavy manufacturing businesses struggle under the tight timelines and structural constraints of a SPAC structure. The massive capital required to build automotive infrastructure from scratch clashed directly with the brutal quarterly expectations of the public markets. Lucid’s majority owner, Saudia Arabia’s Public Investment Fund, has invested over $5 billion post-IPO to solve the car maker’s continued cash needs.

   

2. Fisker Inc.: The Asset-Light Risk

   Fisker attempted to sidestep the capital-intensive infrastructure by adopting an “asset-light” outsourcing model. Instead of spending billions to build its own factories, the company contracted third parties to handle the manufacturing, hoping to focus its resources on vehicle design and software. But this outsourcing model stripped Fisker of direct operational control. Delivery delays and software issues plagued its launch, and the company rapidly burned through the cash it raised from its SPAC merger in 2020. Without a massive capital cushion or an operating infrastructure to fall back on, Fisker’s financial runway simply ran out, and the company filed for bankruptcy in 2024.

© Katherine Dextraze, F Avenue Consulting, 2026

Coming Up Next: Surviving the Cash Crunch 💸

The ultimate lesson of the EV SPAC wave is straightforward: profits are an opinion, but cash is a fact.

You can have a beautiful product design, a compelling story, and a multi-billion-dollar valuation on paper—but the moment your bank balance hits zero, the business is over.

Next week, we are going to look closely at the operational missteps behind Fisker’s sudden collapse. We will look at how their cash runway evaporated, and more importantly, I will walk you through a step-by-step guide on how to build a professional 13-Week Cash Flow Forecast so you can identify and prevent major cash surprises before they threaten your business.

Hit the subscribe button below so you don’t miss next week’s practical template!

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What’s your take? 💬 Do you think the stricter “SPAC 4.0” disclosure rules will help restore credibility to blank-check listings, or did the celebrity-era bubble ruin the reputation of the structure permanently? Let me know!

In finance, we cannot add or subtract money generated by a business across different years. We treat future money from the business almost like a foreign currency. Just as you can’t add 100 Euros to 100 US Dollars without applying an exchange rate, you also can’t add “2031 dollars” to “2026 dollars” without converting them first. We have to convert future money into today’s cash before we can make an investment decision. This is the core of the Time Value of Money (TVM).

The Math of Converting Future Cash

The exchange rate we use to convert future cash into present value is the discount rate. The discount rate is used to adjust the value of future cash flows into today’s value.

To show how this formula works, let’s take a simple example. Suppose a contract guarantees us a single payout of $100 in five years.

• If we use a conservative discount rate of 5%, the present value of that cash today is $78.35

• But if the project carries more risk and we use a discount rate of 12%, that same $100 payout drops to a present value of $56.74 today

By waiting five years under a higher risk profile, the present value of our cash falls by over $21.

How Risk Dictates the Rate

Why would our discount rate change from 5% to 12%? It comes down to how we categorize and handle risk. In finance, we divide risk into two distinct buckets:

• Unsystematic Risk (Firm-Specific): This is risk unique to a single company or project, such as a localized warehouse fire, a supplier delay, or a product recall. We do not adjust our discount rate for these risks because a diversified investor can eliminate them by holding a portfolio of different stocks. Instead, we handle unsystematic risk in the numerator of our valuation model by adjusting our expected cash flow projections downward using probability-weighted scenarios.

• Systematic Risk (Market-Wide): This is macroeconomic risk that affects the entire market, such as broad inflation, supply chain disruptions, or interest rate hikes. Because investors cannot diversify away from systematic risk, they demand a premium to bear it. This risk is priced directly into the denominator of our model—the discount rate.

Quantifying Risk in the Cost of Capital

To calculate the cost of equity (the return equity investors demand for bearing systematic risk), we use the Capital Asset Pricing Model (CAPM)

Let’s walk through each component here:

• The risk-free rate r_f is typically the yield on a 10-year U.S. Treasury bond (~4.7% today)

• The expected market risk premium (r_m— r_f ), also called market return over the risk -free rate, would be the historical market return less the risk-free rate (~4.5% for the US)

• The beta (β) measures how sensitive our specific stock is to macroeconomic swings (ranges from about -2.0 — +2.0, where 1.0 would be matching the broader market exactly)

The beta is the main variable that changes depending on our target company or target industry. For instance, a defensive utility business might have an equity beta of 0.60, meaning its stock is highly stable. On the other hand, a capital-intensive manufacturing or defense business might carry a beta of 1.50. This means if the broader market moves up or down by 10%, that company’s stock historically swings by 15%. Because of this heightened systematic volatility, CAPM mathematically forces the cost of equity higher to compensate investors.

If you would like to explore and compare equity betas by industry, Dr. Aswath Damodaran from NYU hosts an excellent database on his page.

Calculating WACC

Once we know our cost of equity, we blend it with our cost of debt to find the company’s overall discount rate. We use the Weighted Average Cost of Capital (WACC) formula:

Where:

• The current market value of the company’s equity is weighted by the cost of equity we derived from the CAPM equation.

• The current market value of the company’s debt is weighted by the company’s current cost of debt (typically found by looking at the most recently reported interest expenses) and the corporate marginal tax rate. Since interest payments on debt are tax-deductible, the formula reduces the cost of debt by (1 − tax rate) to account for this corporate tax shield.

• If the company has preferred stock, the preferred shares would be included as another term and treated separately from the common equity, since preferred shares have a guaranteed dividend yield.

From the formula, we can tell that the value of equity (the stock price and outstanding shares) and the value of debt (especially if the company issues public bonds) will have a significant impact on the WACC. To see how capital structure shifts WACC in practice, let’s look at a quick example.

Suppose a company has a Cost of Equity (r_equity​) of 10%, a pre-tax Cost of Debt (r_debt​) of 6%, and a marginal tax rate (t) of 25% (making the after-tax cost of debt 4.5%).

• Scenario A: 100% Equity / 0% Debt

  If the company is entirely funded by equity, its WACC is simply equal to its cost of equity: WACC= (1.0 × 10% ) + ( 0.0 × 4.5% ) = 10.0%

• Scenario B: 70% Equity / 30% Debt

  If the company shifts its capital structure to include 30% debt, we blend the two costs: WACC = ( 0.70 × 10% ) +( 0.30 × 4.5% ) = 7.0% + 1.35% = 8.35%

By introducing cheaper, tax-shielded debt into the capital structure, the company lowers its overall WACC from 10.0% to 8.35%. In a valuation model, lowering the discount rate (the denominator) increases the present value of the company’s future cash flows, so executives consider how to fund business investments based on this dynamic.

Key Takeaway

In practice, analysts will run a range of scenarios with different assumptions for discount rates or cash flow projections. The scenarios are based on company-specific or market-driven “What ifs” like “what if it takes six months longer to start up that new factory?” or “what if interest rates change next year?” These factors will impact the present value of an investment and scenarios modeling can help leaders better understand what is at stake and whether a new project still makes sense to pursue.

Ultimately, financial valuation is not about predicting the future with absolute certainty. It is about understanding these risk dynamics so we can translate future uncertainty into clear, logical investment decisions today. We can model or quantify that risk by considering whether a specific risk is firm-specific (unsystematic) or market-wide (systematic) and adjusting our cash forecast or discount rate appropriately.

© Katherine Dextraze, F Avenue Consulting, 2026

Following up on our last post about the satellite sector’s rapid consolidation, let’s look at Viasat (VSAT). After a blowout earnings announcement on August 4, Viasat’s stock popped from $73 to $86 as of close on August 4, 2026. The results looked mixed on the surface: a minor 1% top-line revenue decline to $1.15B and Adjusted EBITDA of $381M for the quarter. But underneath the headline numbers, the market cheered a significantly improved earnings per share of ($0.38), a 12% improvement over the ($0.43) from Q1’26. The EPS improvement was driven by aggressive debt paydown and lower interest expenses – alongside positive Free Cash Flow of $72M, excluding non-recurring items, for the quarter.

If you look at Wall Street research, analysts’ 12-month price targets are all over the place:

• The Low Estimate: $49.00

• The Average Consensus: $94.14 to $95.29

• The High Estimate: $140.00

How do smart analysts look at the exact same business disclosures and arrive at targets that are $90 apart? To understand this, we can look under the hood of one of gold standards for valuing a business – the Discounted Cash Flow (DCF) model. In this post, we will take a look at Viasat’s underlying business model, estimate how the business will growth over the next five years, and deliver a range of stock prices to compare against current analyst target prices.

What Does Viasat Actually Do?

Viasat operates a massive, multi-band global satellite fleet consisting of 23 operational spacecraft. After its transformative acquisition of Inmarsat which was completed in 2023, Viasat reorganized into two distinct operating segments: Communication Services and Defense & Advanced Technologies.

What Does Viasat Actually Do?

Viasat operates a massive, multi-band global satellite fleet consisting of 23 operational spacecraft. After its transformative acquisition of Inmarsat which was completed in 2023, Viasat reorganized into two distinct operating segments: Communication Services and Defense & Advanced Technologies.

1. Communication Services

This segment provides broadband and narrowband connectivity across mobility and fixed markets. It is a tale of two different worlds:

• Aviation IFC, “The Growth Engine”: Providing in-flight Wi-Fi to commercial airlines is Viasat’s crown jewel. In Q1 FY2027, aviation service revenue jumped 11% YoY, with approximately 4,530 commercial aircraft actively connected. This is high-yield, contractually locked enterprise revenue.

• Fixed Services & Other (FS&O), “The Legacy Drag”: This is traditional residential retail satellite internet. Revenue from this segment fell by 27% YoY in Q1 FY2027. Why? Because Viasat is facing brutal LEO competition from Starlink and is intentionally reallocating its constrained bandwidth capacity away from low-margin consumer homes to supply its booming, high-margin commercial aircraft business.

• Maritime & Government Satcom, “The Pivot”: Government satcom services grew 10% YoY, and maritime is rolling out NexusWave, a multi-orbit, multi-band managed connectivity service that bonds Ka-band, LEO, and LTE networks.

2. Defense & Advanced Technologies (DAT)

While Communication Services gets the headlines, DAT is Viasat’s structural stabilizer. This segment focuses on developing products for tactical networking, space payloads, and cybersecurity systems, divided into four key sub-segments:

• Information Security and Cyber Defense: Provides military-grade, “Type 1” and HAIPE-compliant encryption solutions that protect sensitive government communication. It also includes the Move Out / Jump Off (MOJO) expeditionary tactical gateway family, which saw record contract awards of over 100 units in Q1 FY2027.

• Space and Mission Systems: Designs satellite communication architectures, mobile and fixed broadband modems, ground terminals, and antennas. In Q1 FY2027, this segment secured a prime contract under the U.S. Space Force’s Protected Tactical SATCOM-Global (PTS-G) program to build and launch a dual-band X/Ka-band mini-GEO satellite.

• Tactical Networking: Provides resilient communications designed for multi-domain battlespaces, including friendly force tracking systems and the proprietary waveforms developed by TrellisWare Technologies. In Q1 FY2027, this segment grew 36% YoY, fueled by strong tactical communications and TrellisWare product sales to international customers.

• Advanced Technologies and Other (AT&O): Focuses on commercial communication satellite product development, direct-to-device (D2D) cellular-to-satellite integration, and high-margin intellectual property licensing. In Q1 FY2027, AT&O saw a planned decline due to lower IP licensing and royalty-based revenues.

The Equity Analyst’s Engine: How to get Cash Flow to Equity (Levered DCF)

In my previous Rosetta Stone of Finance post and series on Deep Dives into the financial statements, we explored how the three financial statements connect to one another. In a standard DCF, analysts typically project Unlevered Free Cash Flows and discount them at the Weighted Average Cost of Capital (WACC) to find Enterprise Value.

So, when we talk about “value” – we can be referring to either the equity value (or market cap) or the enterprise value (or firm value) of a company. The key difference here is who holds claim to the assets or cash flow: with equity value, common shareholders hold claim the levered cash flows; and with enterprise value, claim holders get the unlevered cash flows (these parties include the company’s common and preferred shareholders, debt holders, and subsidiaries/minority interest). To connect between equity and enterprise value, we use the “valuation rainbow” or “valuation bridge,” which typically refers to a waterfall chart such walking from equity value, adding net debt, minority interest, and preferred equity to get to enterprise value.

For equity analysts looking to estimate equity value and estimate a stock price directly, they can use Levered Free Cash Flow (Cash Flow to Equity) discounted at the firm’s Cost of Equity (r_equity​).

Levered FCF = Operating Cash Flow − Capital Expenditures + Net Borrowing

Because Levered FCF already subtracts interest payments and debt principal movements, discounting these cash flows directly yields the Equity Value of the business. Divide that by the diluted share count (reported on the most recent 10Q or 10K), and you get your target stock price.

Learn how analysts got to their different price targets

Now that we’ve done some background research on our target company, Viasat, and we understand how to use the DCF to get to equity value, let’s take a look at how analysts may have arrived at their different price targets. We’ll start by building out a full DCF to align with the base case.

Read more

This brings us to Rocket Lab’s (RKLB) massive $8.0 billion acquisition of Iridium (IRDM).

The Deal Mechanics & Strategic Rationale

Rocket Lab is buying Iridium for $54 per share in a cash−and−stock transaction (~24% premium over Iridium's closing price on June 26, 2026). Iridium shareholders will receive $27 per share in cash and the rest in Rocket Lab stock.

The strategic rationale is that Rocket Lab gets immediate entry into high-margin space-based applications, globally coordinated L-band spectrum, and a highly profitable customer base of 2.55 million active subscribers. Meanwhile, Iridium secures cost-effective, margin-free access to space via Rocket Lab’s upcoming medium-lift Neutron rocket to replenish its constellation down the road.

The Funding Dilemma: Capital Structure Trade-Offs

How you fund a massive acquisition completely reshapes the future company. Rocket Lab is pulling three distinct funding levers, each carrying heavy corporate finance trade-offs:

1. Cash on the Balance Sheet: Rocket Lab entered the deal with a comfortable $1.38 billion in cash. While spending cash is the cheapest funding source (zero interest or dilution), draining the treasury leaves Rocket Lab with zero cushion to fund the final, capital-intensive development of the Neutron rocket.

2. Debt Financing: Rocket Lab secured a $3.6 billion senior secured bridge loan. While debt keeps equity holders from being diluted, it has a painful catch: pro forma leverage will increase above 7x. Because Rocket Lab doesn’t generate positive EBITDA yet (it posted negative $12 million in Q1), this increased debt load can create a heavy burden of fixed interest expense that has already prompted S&P to place Iridium on a CreditWatch Negative.

3. Equity Issuance: Paying Iridium shareholders with newly minted RKLB stock de-risks the balance sheet but heavily dilutes existing shareholders. If Neutron faces launch delays, the stock could pull back, forcing Rocket Lab to issue even more shares under the transaction’s collar agreement, compounding the dilution risk.

The Ripple Effects Across the Satellite Sector

This deal puts intense pressure on peers like EchoStar (ECHO), Globalstar (GSAT), Telesat (TSAT), and AST SpaceMobile (ASTS) to find their own vertical scale.

But what about the GEO giants? Take Viasat (VSAT), which recently completed its own transformative acquisition of Inmarsat. Viasat is currently trading at ~$86 (up from $73 last week, following their strong earnings report), yet Wall Street’s price targets are vastly higher.

Is Viasat massively undervalued, or is the market underestimating the LEO threat? We will break down Viasat’s valuation and the math behind those analyst targets in our next post.

“If you were marooned on a desert island and could only bring TWO financial statements to evaluate a company’s financial health, which two would you pick—and why?”

To answer that question correctly, you have to understand the most dynamic, honest document in corporate finance: The Statement of Cash Flows.

The Links Between the Financial Statements

While the Income Statement measures accrual profitability over a period and the Balance Sheet provides a cumulative snapshot of assets and liabilities, the Statement of Cash Flows acts as the vital bridge between them. It strips away accounting conventions and answers the ultimate question for any operator or investor: Where did actual cash come from, and where did it go?

Deconstructing the Three Buckets of Cash Flow

Under GAAP accounting, every single dollar entering or exiting a company’s bank account must be categorized into one of three distinct buckets:

1. Cash Flow from Operations (CFO)

   Cash Flow from Operations is the lifeblood of any business and shows us how well the business is doing without the influence of external capital. Cash Flow from Operations takes the accrual Net Income from the Income Statement and converts it back into cash by adjusting for non-cash expenses (like Depreciation & Amortization) and changes in Net Working Capital (ΔNWC). If a company’s CFO is consistently negative while its P&L reports high Net Income, the business is suffering from severe cash collection or inventory accumulation issues.

2. Cash Flow from Investing (CFI)

   CFI reflects long-term capital allocation choices. The primary line item here is Capital Expenditures (Capex), which is cash spent purchasing Property, Plant & Equipment (PP&E) to sustain or grow the business. CFI also records cash spent on M&A acquisitions, cash used to buy longer-term marketable securities (> 3 months), or cash gained from selling off long-term physical assets.

3. Cash Flow from Financing (CFF)

   CFF tracks interactions with the capital markets and how the business is raising capital from external sources. When a company issues new corporate bonds, takes on new bank loan, or raises cash by selling additional shares, it is recorded in CRI. On other hand, cash outflows in CFI include paying down the principal on outstanding debt, buying back shares, and cash dividend distributions to equity holders.

Why Cash Flows from Investing & Financing Are NOT Revenue

A common mistake made by new business owners and non-finance founders is assuming that any cash entering the bank account should be considered “revenue,” and I have seen situations where a small business takes on a PPP loan and tries to report the cash as “revenue” on the income statement.

Let’s look at an example: suppose a tech firm takes on a five million ($5M) credit facility and raises ten million ($10M) in venture equity. The company’s bank account balance jumps by $15 million. However, zero dollars of that cash inflow hit the Income Statement as Revenue. Why?

Revenue represents value created through core operations (exchanging goods or services with customers). So, because the $15M that hit the bank account is not from things that were sold to customers, that cash is instead recorded in Cash Flow from Financing (CFF). This $15M represents borrowed capital or sold equity ownership that carries future liabilities or dilution to existing shareholders.

Similarly, if a manufacturing firm sells an unused warehouse for $2 million, that cash inflow appears under Cash Flow from Investing (CFI). The $2M from the warehouse is a one-time asset liquidation, not a repeatable operating revenue stream.

The Golden Rule: Never confuse capital raised (Financing) or assets sold (Investing) with operational money from customers (Revenue).

How the Cash Flow Statement Is Derived from the Balance Sheet and Income Statement

The Cash Flow Statement is derived directly from the Income Statement for the most recent year, say FY’25, and the changes between two consecutive Balance Sheets (for example, Balance Sheet from FY’24 and Balance Sheet from FY’25​). When you sum the net totals across Cash from Operations, Investing, and Financing, you arrive at the Net Change in Cash:

ΔCash Total = CFO + CFI + CFF

Please note: the triangle symbol Δ is called “delta” means “changes in”.

Adding this ΔCash Total to the Beginning Cash Balance on the Balance Sheet yields the Ending Cash Balance—closing the financial loop. For each bucket of cash flow, we will looks at the appropriate parts of the Income Statement and Balance Sheets to derive what we need.

Deriving Cash Flow from Operations:

Cash Flow from Operations = Net Income + Non-Cash Expenses − ΔCurrent Assets + ΔCurrent Liabilities

For most businesses, Cash Flow from Operations will have to most moving parts of any of the cash flow buckets, so let’s consider a simple example below to show how calculating Cash Flow from Operations works in practice. For our simple business, we grow and sell apples. FY’24 first full year of operation.

• On the Income statement, our Revenue is from selling apples to our customers. The COGS comes from the costs of growing the apples and the direct labor to farm the apples. The Opex (operating expenses) are the rent, utilities, admin salaries, and professional fees like paying our CPA. We have an apple picker for our PP&E and we depreciate the apple picker every year through the Depreciation & Amortization (D&A) line on the Income statement. Lastly, we pay income taxes and a small amount of interest on the loan we used to buy the apple picker, which brings us to our Net Income to start our CFO calculation.

• On our Balance sheet:

  • In the Assets section, we have: the Current assets of Cash & cash equivalents represent cash in our bank account, Accounts receivable that come from customers who have received their apples, but have not yet paid their invoice, Inventory are the apples that have been picked and are waiting to be sold; then our Long-term assets from the purchase of our apple picker which is the PP&E (Property, Plant, & Equipment).

  • For the Liabilities section, we have: Current liabilities of Accounts payable that comes from the invoices that our business has received, but we have not paid yet, such as rent or utilities that are due; in Long-term liabilities, we took on some bank debt to buy our apple picker, so we have the outstanding balance from the Loan for the apple picker, assuming the loan has a 10 year term (so we pay the total principal over 10 years) and a 5% annual interest rate, which drives Interest expense on our Income statement.

  • Lastly, our Equity section includes the Retained Earnings that tracks the cumulative Net Income generated by the business. Since our business just started in FY’24, the opening value of Retained Earnings is set to zero. The business owners also injected $500 startup cash in FY’24 and added another $50 in FY’25 and they were issued stock in exchange, so we see the par value of Common stock and Additional paid-in capital associated with that equity issuance.

Below are the financials for the past two years of our apple business. Remember that the Income statement shows a cumulative “flow” of money, so we only need the data from the most recent year, FY’25. The Balance sheet is a single point in time “snapshot,” so we need two points in time to figure out the cash flow changes between FY’24 and FY’25. You can see below how we use the items from the Income statement and Balance sheet to calculate the Cash from Operations, Investing, and Financing for the apple business.

From the Income statement, we can see that the little apple business is growing and is profitable. The Accounts receivable, Inventory, and Accounts payable items on the Balance sheet are all growing too, which is normal. The business is generating positive cash from operations, which is great. When we look at our CFO calculation, we see that the increase in Accounts receivable and Inventory (Current assets) means that more cash is tied up in those assets, which is reducing our overall cash flow. This is where rapid revenue growth can get tricky. We may need to consider finding ways to get our customers to pay faster or asking for longer payment days with our vendors to hold on to our cash a little longer and make sure the business a bit more breathing room.

The Desert Island Answer Revealed

Now, let’s return to our opening riddle:

If you could only bring TWO financial statements to evaluate a company, which two would you pick?

The Answer: The Balance Sheet and the Income Statement.

The Rationale: If you have the Income Statement for a given period plus two consecutive Balance Sheets (the beginning and ending snapshots for that period), you can mathematically reconstruct the entire Statement of Cash Flows yourself!

• Net Income comes from the Income Statement.

• Non-cash depreciation is inferred from the change in accumulated depreciation.

• Working Capital changes (ΔA/R, ΔInventory, ΔA/P) are calculated by subtracting the old Balance Sheet from the new one.

• Capex and debt movements are derived from changes in PP&E and long-term liabilities.

What if you could only bring ONE statement?

If you were forced to choose just ONE statement, the answer flips: you take the Statement of Cash Flows (specifically Cash Flow from Operations). A company can survive for months or even years reporting negative Net Income, but as soon as the cash balance drops to zero, operations halt, payroll fails, and the firm enters insolvency.

🤖 AI Finance Lab: Reconstructing Cash Flows in 60 Seconds

Let’s put this statement reconciliation into practice using AI.

Exercise: Using your favorite model, upload the recent 10-K filing for Block, Inc. (SQ) or another business you’re interested in.

Try the following prompt to start analyzing and reconciling cash through the financials statements reported in the 10K:

“You are a corporate finance director analyzing cash flow. Navigate to the Consolidated Financial Statements in this 10-K. Extract: (1) Net Income from the Income Statement, (2) Depreciation & Amortization add-back from Operating Cash Flows, (3) Capital Expenditures from Investing Cash Flows, and (4) The Net Working Capital adjustments. Explain in 3 bullet points how management reconciled P&L Net Income to Net Cash Provided by Operating Activities.”

Key Takeaway for Readers

Net Income is an accounting opinion, but cash flow is a hard fact. Always remember: P&L shows profitability, the Balance Sheet shows solvency, but the Statement of Cash Flows shows liquidity and truth.

© Katherine Dextraze, F Avenue Consulting, 2026

How the Balance Sheet got its name

A simple way to understand the mechanics of the Balance Sheet is to use the example of owning a home. Suppose you buy a home valued at $500,000. You put 20% down and pay the rest using a mortgage loan.

Your home’s balance sheet looks like this:

• Asset ($500,000): The physical house—something of value that you control.

• Liability ($400,000): The mortgage loan you secured from the bank to finance the purchase.

• Equity ($100,000): The cash down payment you provided out of your own pocket.

Assets ($500,000) = Liabilities ($400,000) + Equity ($100,000)

The Balance Sheet reports the assets, liabilities, and equity of the business at a point in time and the value of the assets will always equal the total value of the liabilities and equity, so the Balance Sheet always balances. This is because every asset a company owns has to be paid for somehow. There are only two ways a business can pay for an asset:

1. Borrowing money from external creditors (creating a Liability, such as debt or trade payables).

2. Using capital from owners, meaning cash that was injected directly by shareholders or cash generated from cumulative past profits retained in the business (creating Equity).

Because every dollar of assets is claimed by either a creditor or an owner, Assets must always equal Liabilities + Equity.

Key Components of the Balance Sheet

Let’s take a look at corporate balance sheet. On a standard GAAP Balance Sheet, Assets and Liabilities are ordered by liquidity (how quickly they convert into cash) and classified into two primary time horizons:

• Current (Short-Term): Expected to convert into cash, be consumed, or be settled within 12 months.

• Long-Term (Non-Current): Obligations or commitments extending beyond 12 months.

This timing distinction is critical to understanding the different between a company’s long-term strategic investments versus the day-to-day operational engine funded by working capital.

Looking at the assets of Block, Inc., we see that “Current assets” are specifically categorized on the balance sheet and include cash and cash equivalents, receivables from settlement and customers, customer funds, and more. The long-term assets start with Property and equipment (also called PP&E), then goodwill and acquired intangible assets that come from buying other businesses, and other long-term investments specific to Block’s business model.

You might notice that in the “Current assets” section, Block lists “loans held for investment,” and maybe that feels a bit odd since we would typically see a loan listed in liabilities, right? This is where the unique aspects of Block’s business model show up - these specific loans are short-term loans that Block has offered to their users through Cash App Borrow and Square. So, Block expects to be repaid from their users and they list that future repayment as current asset.

Now, let’s take a look at the liabilities of Block, Inc. We see that the liabilities also start with “Current liabilities” and include customers payable (customers that have requested payout and are waiting for Block to process it), accrued expenses and other such as payroll or rent that is coming due, current portion of long-term debt meaning any part of a long-term loan use for general corporate borrowing that needs to paid, and warehouse funding facilities, current that Block uses to back their loans to consumers. The long-term liabilities start with Deferred tax liabilities, then long-term portions of the warehouse funding facilities and long-term debt that come from buying other businesses, and other long-term liabilities specific to Block’s business model.

To finish out the balance sheet, let’s look at the stockholders equity section. The first thing you can check is whether the total liabilities & stockholders’ equity matches the total assets. Then, let’s look at the line items - we several types of equity that have not been issued yet and have a zero value, then additional paid in capital which tracks the money that investors originally paid for the shares that are currently outstanding, accumulated other comprehensive loss from unrealized losses (market price shift) on the marketable debt securities that they hold, and retained earnings which tracks the cumulative net income generated by the business. Retained earnings and net income are the key links between the balance sheet and the income statement.

You will also notice that Block has multiple types of equity listed - preferred stock, Class A common stock, and Class B common stock. Block’s leadership and board of directors has to approve any new shares that the company wants to issue, so you can see that each of these types of equity say “authorized” for a certain number of shares - but none of those shares have been issued yet. More to come on the different types of stock.

The Strategic Pillars of the Balance Sheet

Running a business revolves around two primary decisions: how to raise capital and how to invest capital. Through analyzing the Balance Sheet, we can start to see how the company’s leadership executes across three critical strategic pillars: capital allocation, capital structure, and operational execution.

1. Capital Allocation: Where Management Bets Its Future

   The P&L shows what a company earned this quarter, but the Asset side of the Balance Sheet reveals where leadership has chosen to deploy long-term resources. Is the company reinvesting in organic expansion (PP&E and R&D infrastructure), buying market share through acquisitions (recorded as Goodwill and Intangibles), or hoarding cash for optionality?

2. Capital Structure & Strategic Flexibility: How Bets Are Funded

   How a business is funded will directly impact the leadership’s ability to execute on the corporate strategy. The Liabilities & Equity side exposes a company’s leverage and financial durability. A balance sheet with lots of long-term debt will show high fixed interest expenses on the Income Statement, so cash is tied up in paying the debt and will limit leadership’s ability to execute on ambitious growth strategies or strategic pivots during downturns. On the other hand, a clean balance sheet with low debt (also called “leverage”) and sufficient cash can provide the "dry powder" needed to execute opportunistic M&A or survive macro shocks.

3. Operational Execution & Working Capital Velocity

   As a business grows, cash can get trapped in operational holding areas: Accounts Receivable (A/R) from customers who still need to pay their invoices and Inventory sitting on shelves. This ‘trapped’ cash can be offset by Accounts Payable (A/P), where the business can try to hold on to cash longer by extending the number of days it has to pay its suppliers. A growth strategy can look great on a P&L, but operational execution happens on the Balance Sheet through Net Working Capital (NWC):

   NWC = Current Assets (AR & Inventory) − Current Liabilities (AP)

   Net Working Capital is a critical component to understanding how much cash the business is generating to pay its bills. For instance, if the AR balance is increasing, it tells us that customers are taking longer to pay their bills and we may need to ask our suppliers for longer payment terms. This brings us to the next core operational concept - the Cash Conversion Cycle. The cash conversion cycle tracks how how many days it takes to turn cash the business spent on inventory into cash collected from sales. There are three key metrics that drive the cash conversion cycle:

   • Days Sales Outstanding (DSO): How quickly customers pay their credit bills.

   • Days Inventory Outstanding (DIO): How long inventory sits before selling.

   • Days Payable Outstanding (DPO): How long the company takes to pay its trade suppliers.

Executive Real-World Anecdote: The Working Capital Trap

When I was in renewable energy, I saw solar install businesses grow their sales rapidly, sometimes 2-3x in a short period of time. Each install required purchasing expensive inventory (panels, inverters, batteries) that was subject to changing tariffs and paying installation labor sometimes weeks before receiving the final payments from customers. If customers were unhappy or facing issues with their new solar, the might even refuse to pay all together. From a P&L perspective, these businesses showed strong revenue growth and profitability. But on the balance sheet, AR from customers was increasing rapidly, trapping much needed cash.

Managing the Balance Sheet is the critical difference between scaling a business sustainably and running out of cash during a growth spurt.

Suggested Exercise: AI Finance Lab

Exercise: Open a notebook with your preferred model and upload the recent 10-K filings for Block, Inc. (SQ) or another company that you’re interested in. Use the following prompt to start a conversation about the company’s balance sheet:

"You are a corporate finance director interested in the liquidity and cash performance of the business. Analyze the Consolidated Balance Sheets and Statements of Cash Flows in this filing. Extract Current Assets (including A/R and Inventory) and Current Liabilities (A/P) for the last two fiscal years. Calculate the change in Net Working Capital and summarize management's disclosures in Item 7 (MD&A) regarding working capital liquidity and cash collection performance."

© Katherine Dextraze, F Avenue Consulting, 2026

The Income Statement

The Income Statement or P&L shows the total revenue generated from sales and the costs associated with those sales, ending with Net Income.

Revenue is the total money a business makes from selling products or services. Revenue must be earned from providing a product or service to a customer and does not include cash received from “non-operating” activities like cash from a loan or cash from selling shares.

Cost of Good Sold (COGS) is the total direct costs to create a product or deliver a service. COGS includes the cost of raw materials, direct labor used to physically build or create a product, and production overhead like the cost to maintain a factory. COGS will typically scale directly with the number of units that the business manufactures. Gross Profit is the total Revenue, less the total COGS.

Operating Expenses (Opex) represent administrative overhead and selling, general, and admin (SG&A) costs. These costs typically do not scale directly with the number of units that the business produces. Opex includes costs such as sales & marketing for advertising and sales commissions, administrative costs like office rent and legal/accounting services, and indirect salaries for central corporate functions such as corporate executives and HR. Operating Income or Earnings Before Interest & Taxes (EBIT) is the Gross Profit, less the total Opex.

Interest & tax expenses include interest accrued on any outstanding loans and can also include interest collected from investing in financial instruments like government bonds. Taxes refer to the income taxes that the company is required to pay based on its headquarters - in some cases, businesses with a wide international presence will pay income taxes in multiple countries. Net Income is Operating Income or EBIT, less the total interest & tax expenses.

Net Income will be the key link between the Income Statement, the Balance sheet (through Retained Earnings in the equity section), and the Cash Flow Statement (trough Cash Flow from Operations).

The Income Statement or P&L shows the classic top-to-bottom waterfall:

• Revenue – Cost of Goods Sold (COGS) = Gross Profit

  • → Gross Profit – Operating Expenses (Opex) = Operating income or Earnings Before Interest and Taxes (EBIT)

    • →EBIT – Interest & Taxes = Net Income

The Danger of P&L Tunnel Vision

The biggest trap for non-finance executives is managing the P&L in a vacuum. A company can show booming revenue and healthy Net Income while sprinting straight toward insolvency.

Why? Because the Income Statement is built on Accrual Accounting, not Cash Accounting.

• Cash Accounting: Recognizes revenue when cash is deposited into the bank, and expenses when cash leaves the account. Most smaller businesses rely primarily on cash accounting due to its simplicity.

• Accrual Accounting (GAAP Standard): Recognizes revenue when performance obligations are satisfied (when the money is actually earned),and matches expenses to the period in which they helped generate that revenue, regardless of when cash is actually deposited. Accrual accounting is required for publicly traded companies, per the Generally Accepted Accounting Principles (GAAP), and reports a clearer picture of the company’s finances.

If you focus solely on P&L metrics like Gross Margin or EBIT (or EBITDA), you miss how revenue recognition impacts the Balance Sheet and Cash Flow Statement.

Impact of cash versus accrual accounting example

Let’s say you’re running a software business and your sales team lands a major $1 million deal with a client for a 12 month subscription.

Cash accounting:

• Customer pays the $1 million up front and your revenue and profitability for month 1 look awesome.

• But next month, you will still need to pay for the engineers, server hosts, and other suppliers, and you won’t have any revenue to offset those costs.

Accrual accounting:

• Customer pays the $1 million up front, which gets reported on the Balance Sheet (more on this later).

• Revenue is recognized as the service is provided, breaking up the $1 million payment over 12 months (and reducing the value on the balance sheet).

• Expenses are reported monthly with the associated revenue and the profitability is more consistent and accurate.

The Executive Real-World Takeaway

During my time in corporate finance and later running a company as CEO, I repeatedly saw how payment terms, inventory lags, and capital commitments can dictate the survival of a business. Don’t judge the health of a company by its top-line growth or Net Income alone. Always ask: "How much actual cash did it cost to generate that profit?"

Net Income is an accounting convention—it is not cash in the bank. As an executive or financial analyst, your job isn’t just to manage the P&L; it’s to understand how every dollar on the Income Statement flows into working capital and cash generation to sustain the business.

© Katherine Dextraze, F Avenue Consulting, 2026

Why publicly traded companies are required to report financials

Publicly traded (or simply, “public”) companies don’t publish financial statements out of goodwill. After the stock market crash in 1929 and resulting Great Depression, Congress passed the Securities Exchange Act of 1934 and formed the Securities and Exchange Commission (SEC) to regulate financial markets. Today, any publicly traded company listed on a US exchange must provide transparent, audited financial disclosures to the SEC. The goal of this mandate is to ensure that capital markets operate efficiently, preventing insider trading fraud and misleading statements from company executives.

The two main financial disclosures every investor and operator tracks are:

• Form 10-K: The comprehensive annual report covering audited financial statements, risk factors (Item 1A), and Management’s Discussion & Analysis (MD&A / Item 7).

• Form 10-Q: The quarterly, unaudited update tracking performance across three individual quarters.

Introduction to the three financial statements

In both the Form 10-K and Form 10-Q, the company will report three key financial statements:

• Income statement (also called “Consolidated statement of operations” in the Forms) showing total revenue, expenses, and net income for the period.

• Balance sheet reporting total assets, liabilities, and equity at the end of the period.

• Cash flow statement showing the total cash generated from operations, from investing (or capital expenditures aka “capex”), and from financing such as issuing debt or stock.

Real world example

Let’s consider the company, Block, Inc. [ NYSE: XYZ ], the fintech company that owns consumer-facing apps like Cash App and Square and crypto platforms like Bitkey and Proto.

If we look at Block’s latest 10K, we can see the following trends:

• On the income statement, Revenue for 2025 was essentially the same (“flat”) to 2024, due to declines in the bitcoin ecosystem. After all expenses, net income profit margin was 5% for 2025, down from 12% in 2024, driven by increased operating expenses and higher interest expense.

• On the balance sheet, we can see that the main changes in assets are growth in the “loans held for investment,” originating from a new product called “Cash App Borrow” that the company launched in 2025.

• On the cash flow statement, you will see that Block has a lot of activity in the “cash flows from investing” section. For a standard widget-type company, this section would usually include only a few transactions from buying or selling large equipment (aka ‘capital expenditures’). Since Block is a fintech company that holds customer funds and offers borrowing, they use “marketable debt securities” like government bonds to manage customer funds safely and earn interest on the cash that they hold for their customers.

The Takeaway: A single financial statement only gives you a single dimension of information. To evaluate a company's financial health, you need to consider how all three statements connect.

Suggested Exercise

Try checking out the SEC EDGAR website to look up financials for a company you’re interested in. You can also use AI tools like Gemini Notebook to collect several 10Ks and 10Qs and chat with Gemini about the reports.

© Katherine Dextraze, F Avenue Consulting, 2026

Whether you’re an undergrad eyeing Wall Street, an MBA student pivoting careers, or an executive running a P&L, my unique approach to explaining finance bridges the gap between financial theory and boardroom execution.

About Katherine Dextraze

Hi, I’m Katherine. My career spans investment banking at a major bulge bracket bank, corporate finance and multi-billion-dollar M&A long-range planning at a global pharmaceutical company, and operating as CEO of a private-equity backed high-growth renewable energy business. I pivoted into finance through my MBA and I’m passionate about helping students and experienced professionals build confidence in financial concepts and understand the “why” behind the numbers.

Disclaimer: all content presented here is for educational purposes only. No posts, notes, or discussions should be interpreted as investment or personal financial advice.