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Assess an AI company by reconciling three connected questions: How fast is comparable revenue growing? How much of each dollar remains after the costs of delivering it? and How much cash does the business generate or consume after working-capital timing and investment? Use the same fiscal periods, separate GAAP from adjusted measures, read the cash-flow statement rather than a headline “burn” number, and treat liquidity as a balance-sheet resource—not proof of cash generation.
Start with a comparable evidence set
Before calculating a ratio, create a worksheet for each company and reporting period. Record the fiscal year-end, quarter dates, currency, accounting basis, revenue categories, margin definitions, operating cash flow, capital expenditures, capitalized software, financing flows, cash, marketable securities, debt and management’s stated liquidity needs. A ratio without its period and definition is not comparable.
Align the reporting periods
Compare a company’s latest fiscal year with another company’s latest fiscal year only when the periods are reasonably aligned. A December year-end and an April year-end can reflect different demand cycles, product launches or budget seasons. For quarterly analysis, use the same quarter sequence or a trailing-12-month period. Label every figure as a quarter, fiscal year or trailing period; do not mix a quarter from one issuer with a full year from another.
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Capture the number first, then the company’s explanation of what moved it. Management may attribute revenue to new customers, expansion, usage, pricing, acquisitions or a change in contract mix. Those explanations are hypotheses to test against segment disclosures, deferred revenue, customer collections and the cash-flow statement—not replacements for the reported result.
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Keep accounting labels attached
Use the exact label supplied by the issuer: GAAP revenue, subscription revenue, GAAP gross margin, non-GAAP gross margin, operating cash flow or the issuer’s defined free cash flow. “Margin” and “cash burn” are incomplete descriptions unless the basis and period are stated beside them.
Measure revenue growth and its quality
Calculate growth as (current-period revenue − prior-period revenue) ÷ prior-period revenue. Use the same measure in both periods. If a company changes its presentation, restates a period or acquires a business, explain the effect before comparing percentages.
Look beyond total revenue
Total revenue can conceal a shift between recurring subscriptions, usage, professional services, hardware, royalties or one-time implementation work. Pull out the categories the company discloses and calculate each category’s share of total revenue and its year-over-year change. Recurring revenue that grows while services decline tells a different story from total revenue lifted by a single implementation project.
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C3 AI’s fiscal 2026 release illustrates why this decomposition matters: it reported $250.3 million in total revenue and $227.1 million in subscription revenue for the fiscal year ended April 30, 2026. Those are company-level results for one fiscal year, not a sector benchmark. The gap between the categories should prompt questions about professional-services activity and the economics of delivering each stream.
Test whether growth converts to collections
Revenue is recognized under accounting rules; cash arrives when customers pay. Examine accounts receivable, deferred revenue, contract assets and the cash-flow statement’s working-capital adjustments. A growing receivables balance can make reported growth look stronger than near-term cash generation. Conversely, a large increase in deferred revenue can produce cash before the related revenue is recognized.
C3 AI identifies customer collections from subscription and professional-services contracts as its largest source of operating cash. Compare those collections with billed revenue, receivables and deferred revenue over several periods. A widening gap is not automatically a problem—contract terms and billing schedules can explain it—but it requires an explanation.
Distinguish organic and acquired growth
When an issuer discloses acquisition effects, show reported growth and growth excluding acquired revenue. Also note foreign-exchange effects, divestitures and changes in contract duration. If the filing does not provide an organic figure, say so rather than inventing one.
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Read growth against customer concentration and retention
Check whether a small number of customers supply a material share of revenue, whether renewal or net-retention metrics are disclosed, and whether the company depends on a channel partner. Rapid growth driven by one contract has different durability and collection risk from broad expansion across many accounts. Use the company’s stated definitions for retention metrics; do not compare percentages calculated with different customer cohorts.
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Analyze margins on the correct accounting basis
Gross margin is (revenue − cost of revenue) ÷ revenue. It describes delivery economics before sales, research, general administration, interest and taxes. AI businesses may include cloud hosting, model-inference costs, data licensing, personnel, third-party software and support in cost of revenue. Ask which costs are included and whether the mix changed.
Put GAAP first
Start with GAAP gross margin because it is the standardized figure in the financial statements. Then inspect the reconciliation for any adjusted or non-GAAP measure. Adjusted metrics can exclude stock-based compensation, amortization, restructuring or other items; those costs may still consume cash or represent ongoing compensation.
C3 AI reported a 31% GAAP gross margin and a 46% non-GAAP gross margin for fiscal 2026. The figures describe that company and period only. The 15-percentage-point difference is a prompt to read the reconciliation, not evidence that one figure is “the real margin.” Record the exclusions and determine whether they recur.
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Calculate the change in percentage points and explain the bridge. Common drivers include a higher share of services, cloud-hosting price changes, inference volume, data-center commitments, customer support, pricing, implementation efficiency and amortization. A margin increase caused by a temporary hosting credit is less durable than one caused by repeatable pricing or lower unit costs.
Do not substitute operating margin for gross margin
Gross margin answers whether the product or service can cover direct delivery costs. Operating margin also reflects sales and marketing, research and development, and general and administrative spending. An AI company can have improving gross margin while increasing operating losses because it is investing heavily in model development or distribution. Keep these questions separate in your worksheet.
Compare adjusted margins only after normalizing definitions
If two companies both publish “non-GAAP gross margin,” list every exclusion for each company. One may exclude stock-based compensation while another excludes hosting credits or amortization. Use GAAP for the primary comparison and adjusted figures as supplemental information with the reconciliation attached.
Define cash burn before calculating it
“Cash burn” is a shorthand, not a single accounting line. State the measure and period in the heading of your analysis. Operating cash flow (OCF) is the starting point because it captures cash generated or used by ordinary operations, including working-capital timing. Free cash flow (FCF) commonly subtracts selected investment spending from OCF, but every issuer can define it differently.
Read operating cash flow first
On the statement of cash flows, identify net cash provided by or used in operating activities. Then inspect the reconciliation from net income: non-cash stock compensation, depreciation, amortization, deferred taxes, receivables, payables, deferred revenue and other working-capital movements. A positive OCF quarter can reflect a temporary receipt of customer cash; a negative quarter can reflect annual prepayments to suppliers. Examine a multi-quarter trend before calling either result a run rate.
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C3 AI’s Form 10-Q for the three months ended July 31, 2026, reported $2.072 million of operating cash inflow, compared with $33.535 million of operating cash outflow in the comparable 2025 quarter. The year-over-year change is important, but one quarter is not a stable burn rate. Review the intervening quarters and the working-capital lines before extrapolating.
Calculate free cash flow using the issuer’s formula
A common formula is FCF = operating cash flow − capital expenditures − capitalized software. Verify whether the company includes purchases of property and equipment, capitalized internal-use software, finance-lease payments or other items. Vertex defines free cash flow as operating cash flow less purchases of property and equipment and capitalized software, and defines free-cash-flow margin as free cash flow divided by revenue. Preserve that definition when comparing Vertex with another issuer, and read the company’s warning that non-GAAP measures should be considered alongside GAAP financial measures.
Separate operating spending from investment spending
Capital expenditure and capitalized software can be essential to an AI company’s infrastructure, but they sit outside OCF. A business with positive OCF and heavy data-center or software investment may have negative FCF. Conversely, a company that capitalizes costs may defer their cash impact in the current period. Compare both OCF and FCF, and list the investment items that bridge them.
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For a volatile quarterly business, sum the last four quarters of OCF and FCF, then compare that total with the preceding four quarters. Keep the quarterly detail visible so seasonal collections or annual vendor payments are not hidden. If fewer than four quarters are available, label the shorter window and avoid annualizing it as a forecast.
Assess working capital and cash conversion
Cash conversion explains why revenue and profit do—or do not—turn into cash. Build a bridge from revenue to collections and from operating income to OCF.
Receivables and collection timing
Review accounts receivable growth relative to revenue growth, allowance changes and the company’s discussion of payment terms. Receivables growing materially faster than revenue can indicate longer collection cycles, although a large customer invoice or a new billing schedule may explain the difference.
Deferred revenue and contract liabilities
Subscription customers often pay before service is delivered. An increase in deferred revenue can boost OCF while reducing the amount of revenue recognized in the period. Track the balance and releases over time; do not treat the cash benefit as permanent unless renewal and billing patterns support it.
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Delaying payment to suppliers can temporarily improve OCF. Check accounts payable, accrued hosting costs, purchase commitments and any unusual quarter-end movement. A reversal in the next period can make cash generation appear to collapse even when demand is unchanged.
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Customer collections as a quality check
Where disclosed, compare cash collected from customers with billed revenue and the movement in receivables and deferred revenue. C3 AI’s statement that customer collections are its largest operating-cash source provides a useful example of the question to ask: are collections broad, repeatable and consistent with contract terms?
Evaluate liquidity without claiming a false runway
List cash and equivalents, marketable securities, restricted cash, debt maturities, credit facilities, operating leases and expected capital needs. Cash on the balance sheet is a stock; OCF and FCF are flows. A large stock does not prove that the business is generating cash or that every asset is immediately available.
Keep cash components distinct
C3 AI reported $136.4 million in cash and cash equivalents and $514.6 million in marketable securities as of July 31, 2026. Presenting the components separately matters: securities may have maturity, price, liquidity or contractual restrictions that cash does not. Read the filing’s liquidity discussion before adding them into an “available” total.
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Map financing flows
Debt issuance, equity sales, revolver draws and repayments can increase or decrease cash without changing operating performance. Show operating, investing and financing cash flows in separate columns. A quarter with rising cash because of a financing inflow should not be described as a quarter of improved cash generation.
Use scenario-based runway
If you estimate runway, state the opening liquidity pool, the OCF or FCF measure, the investment level, financing availability and the period covered. Use at least a base case, a weaker-collections case and a higher-investment case. Do not divide a single quarter’s cash balance by a single quarter’s burn and present the quotient as a forecast. Management’s discussion of future negative cash flows and capital requirements is forward-looking and not a guarantee.
Compare companies on the same decision axes
The following grid keeps a comparison from collapsing into one headline ratio.
| Axis | What to collect | Questions to answer |
|---|---|---|
| Growth | Total revenue, recurring or subscription revenue, segment mix, reported and organic changes | Are periods aligned? What customers, products or contract changes drove the movement? |
| Gross margin | GAAP gross margin, cost-of-revenue components, adjusted reconciliation | Which delivery costs are included? Is the change structural, mix-driven or temporary? |
| Cash conversion | OCF, receivables, deferred revenue, collections and payables | Are reported sales turning into collected cash, and is working capital distorting the period? |
| Investment burden | Property and equipment purchases, capitalized software and other investing cash flows | What spending is required to sustain growth, and how does it change FCF? |
| Liquidity and financing | Cash, marketable securities, debt, maturities, facilities and financing flows | Which assets are available, what obligations are near term, and is cash rising from operations or financing? |
Use issuer examples without turning them into benchmarks
C3 AI: connect revenue, margins and cash flow
For fiscal 2026, C3 AI’s reported total and subscription revenue provide a composition check, while its 31% GAAP and 46% non-GAAP gross margins show why basis labels matter. Its July 31, 2026 quarter demonstrates cash-flow volatility: a $2.072 million OCF inflow followed a $33.535 million OCF outflow in the comparable 2025 quarter. The same filing’s cash and marketable-securities balances show why liquidity and cash generation must be analyzed separately. Use the company’s collection commentary and working-capital disclosures to test whether the improvement is repeatable.
Amplitude: distinguish a company result from a sector claim
Amplitude reported $29.8 million of operating cash flow and $23.5 million of free cash flow for 2025 in its 2025 Form 10-K, covering the year ended December 31, 2025. Record the figures with that year and the company’s definitions. They demonstrate that an AI-associated software company can report positive OCF and FCF, but they do not establish what an AI company “should” generate.
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Vertex: preserve the free-cash-flow definition
Vertex’s definition—OCF less purchases of property and equipment and capitalized software—illustrates why two FCF figures may not be interchangeable. Copy the formula into the comparison sheet, identify any exclusions and place the result beside GAAP cash-flow data.
Interpret management commentary alongside numbers
Management statements can identify risks or internal priorities, but they are not financial evidence by themselves. C3 AI Chairman and Chief Executive Officer Thomas M. Siebel said in the fiscal 2026 earnings release: “The sales performance over recent quarters has been entirely unacceptable, to the point of surreal.” Treat that statement as context for investigating bookings, pipeline, customer additions, revenue composition and collections. Do not let a candid quote replace the reported results or become a forecast.
Separate three layers in your notes:
- Actual: filed revenue, margins, OCF, FCF, balances and cash-flow movements.
- Explanation: management’s account of customers, pricing, costs, collections and investments.
- Expectation: guidance, planned spending, expected losses or stated capital needs.
Only the first layer is historical fact. The second is an explanation to test; the third depends on execution and conditions.
Common analytical mistakes and fixes
Using a single growth percentage
Mistake: treating total revenue growth as proof of durable recurring demand. Fix: split disclosed revenue streams, identify one-time items and test collections and retention.
Mixing GAAP and adjusted margins
Mistake: comparing one company’s GAAP margin with another’s non-GAAP margin. Fix: compare GAAP first, then show each adjusted reconciliation separately.
Calling negative OCF the entire burn
Mistake: ignoring capital expenditure, capitalized software and working-capital timing. Fix: show OCF, investment cash flow and the issuer-defined FCF bridge.
Adding all securities to cash automatically
Mistake: assuming marketable securities are identical to cash and immediately deployable. Fix: list them separately and read restrictions, maturities and liquidity disclosures.
Annualizing one unusual quarter
Mistake: multiplying a quarter’s inflow or outflow by four. Fix: use trailing four-quarter totals and explain seasonality or large receipts and payments.
Inventing a universal “healthy” threshold
Mistake: applying one growth, margin or burn target to every AI business. Fix: compare each company with its own prior periods and business model. The company examples above are not a representative industry sample.
A repeatable filing-review workflow
- Define the comparison: choose companies, fiscal periods, currency and whether the view is quarterly, annual or trailing 12 months.
- Extract revenue: record total and disclosed recurring or segment revenue, then calculate growth and mix.
- Validate the driver: read customer, pricing, usage, acquisition and contract explanations; check concentration and retention disclosures.
- Record margins: enter GAAP gross margin, cost-of-revenue details and any adjusted measure with its reconciliation.
- Build the cash bridge: start with OCF, list non-cash and working-capital movements, then subtract the issuer’s specified investment items to derive FCF.
- Review liquidity: separate cash, securities, restricted amounts, debt and financing flows; note stated capital requirements.
- Stress-test: model weaker collections, slower growth and higher infrastructure or software investment without assuming new financing.
- Write the conclusion: state whether growth is broad, margins are improving on a comparable basis, cash conversion is repeatable and liquidity covers the identified obligations under your assumptions.
Make the final judgment without a magic score
A financially stronger profile usually has several features at once: revenue growth that is broad and collected, GAAP gross margin that is stable or improving for identifiable reasons, OCF that remains healthy after working-capital normalization, FCF that reflects the true investment burden, and liquidity supported by operations rather than repeated financing. A company can be attractive on one axis and weak on another; your conclusion should name the trade-off.
There is no established universal growth rate, margin threshold or cash-burn limit that defines a healthy AI company. Business model, contract structure, infrastructure intensity, customer concentration, accounting choices and funding access differ widely. Use issuer-level evidence, preserve definitions and periods, and make every runway or quality judgment conditional on explicit assumptions.
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