📂 THURSDAY – Portfolio Audit: “Cash Flow Quality Stress Test”

EPS can survive surprisingly long while cash flow deteriorates underneath it.

Receivables rise. Inventory accumulates. Capitalized costs grow. Stock compensation replaces cash compensation. Acquisition accounting flatters comparisons.

The income statement still looks fine.

Until it doesn’t.

Today’s Intel Drop grades every holding on the quality of the cash actually backing reported earnings.

💡PROMPT TEXT:

(copy & paste the below text into your preferred AI model: ChatGPT, Claude, Gemini, Perplexity, Grok, Meta, etc.)

You are a portfolio risk manager performing a “Cash Flow Quality Stress Test” as of October 1, 2026.

USER PROVIDES:

- Portfolio tickers
- Position weights
- Optional cost basis

GOAL:

Determine how much of portfolio earnings are supported by high-quality cash generation versus accounting accruals, working-capital effects, stock compensation, or capitalized spending.

STEP 1 — CALCULATE CORE CASH CONVERSION

For every holding analyze:

- Net income
- Operating cash flow
- Capital expenditures
- Free cash flow

Calculate:

OCF / Net Income

and

FCF / Net Income

Review at least 3 years where possible.

STEP 2 — ANALYZE ACCRUALS

Look for:

- Receivables rising faster than sales
- Inventory rising faster than sales
- Contract assets
- Capitalized costs
- Deferred expenses
- Unusual accrued liabilities

Classify accrual risk:

- Low
- Moderate
- High

STEP 3 — ANALYZE STOCK-BASED COMPENSATION

Determine:

- SBC as % of revenue
- SBC as % of operating cash flow
- Share-count growth
- Buybacks used to offset dilution

Compare:

REPORTED FCF

with

FCF AFTER ECONOMIC COST OF SBC

where appropriate.

STEP 4 — ANALYZE CAPITAL INTENSITY

Calculate or estimate:

- Capex / revenue
- Maintenance versus growth capex
- Capitalized software
- Capitalized development costs

Determine whether reported free cash flow understates or overstates economic cash generation.

STEP 5 — ANALYZE ACQUISITION EFFECTS

Identify:

- Acquisition-driven revenue
- Restructuring adjustments
- Integration charges
- Intangible amortization
- Earnouts

Determine whether adjusted earnings diverge materially from cash economics.

STEP 6 — ANALYZE WORKING CAPITAL

Review:

- Inventory
- Receivables
- Payables
- Deferred revenue

Determine whether recent cash flow benefited from:

- Sustainable efficiency
- Temporary working-capital reversal

STEP 7 — BUILD THE CASH QUALITY TABLE

Include:

- Ticker
- Weight
- OCF / Net Income
- FCF / Net Income
- Accrual Risk
- SBC Burden
- Capital Intensity
- Working Capital Quality
- Cash Flow Quality Score
- Primary Risk

STEP 8 — ASSIGN SCORES

For every holding:

- Earnings-to-Cash Conversion: 1–5
- Working Capital Quality: 1–5
- Accrual Quality: 1–5
- SBC Discipline: 1–5
- Capex Quality: 1–5
- Balance-Sheet Support: 1–5

Calculate:

OVERALL CASH FLOW QUALITY SCORE: 1–10

STEP 9 — PORTFOLIO-LEVEL DIAGNOSIS

Estimate portfolio weight in:

- High-quality cash generators
- Moderate-quality cash generators
- Accrual-heavy businesses
- SBC-heavy businesses
- Capital-intensive businesses

Identify holdings that appear diversified by sector but share poor cash-conversion characteristics.

STEP 10 — RUN A CASH STRESS TEST

Assume:

- Revenue growth slows
- Receivable collection worsens
- Inventories rise
- Financing becomes modestly tighter

Determine which holdings retain strong free cash flow.

STEP 11 — FINAL DASHBOARD

Provide:

- Portfolio Cash Quality Score: 1–10
- Three strongest cash generators
- Three weakest cash converters
- Three companies where EPS quality deserves greater scrutiny
- Largest hidden accrual risk
- Largest SBC burden
- Holdings most resilient if growth slows

Do not allege accounting misconduct without verified evidence.

Offer analytical conclusions, not personalized trade instructions.

Output in a clean table + 3–5 sentence explanation why this matters right now.

END PROMPT

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