NorthPeak Fitness is a mid-market connected fitness company that sells smart exercise equipment and a subscription app. The company generated $420M revenue last year, is EBITDA-positive, and is preparing for a potential IPO in 18-24 months. Management has grown quickly through hardware sales, but investors are increasingly focused on the quality of earnings, cash generation, and whether reported profit is translating into real liquidity.
You are a strategy manager supporting the CFO ahead of an investor roadshow. The CFO wants a simple but rigorous explanation of how the income statement, balance sheet, and cash flow statement connect, and how those linkages affect strategic decisions such as pricing, inventory investment, payment terms, and capital spending. The goal is not accounting trivia; it is to show how operational choices flow through the business and influence growth capacity, valuation, and financing needs.
A board member has asked a practical question: "If NorthPeak grows revenue 20% next year, why might cash still decline even if net income rises?" You need to answer using the three statements and a concrete operating example.
Use the following simplified baseline for FY2025:
| Item | FY2025 Value |
|---|---|
| Revenue | $420M |
| Gross Profit | $168M |
| Operating Expenses (excl. D&A) | $120M |
| Depreciation & Amortization | $12M |
| Interest Expense | $6M |
| Tax Rate | 25% |
| Cash | $38M |
| Accounts Receivable | $42M |
| Inventory | $55M |
| Accounts Payable | $36M |
| Net PP&E | $90M |
| Debt | $80M |
| Shareholders' Equity | $109M |
Additional assumptions for the next year scenario: