Karat Packaging Inc. (KRT) Cash Flow Statement

The OCF/NI ratio has been consistently above 1.0 in most quarters, with a notable spike to 2.26 in 2025Q4, suggesting that reported earnings are well-backed by cash generation. The only exception was 2025Q3, where OCF/NI dropped to 0.13, likely due to a significant working capital outflow, but this appears to be a temporary anomaly. The strong conversion in 2026Q2, despite a large net income figure, reinforces the view that earnings are not accrual-heavy.

The FCF trajectory shows a clear upward trend, with 2026Q2 FCF of $31.8M nearly tripling the prior year's $9.6M. This improvement is driven by a combination of higher net income and relatively stable capital expenditures, which remain below 2% of revenue. The record FCF margin suggests that the company is converting its revenue growth into cash at an accelerating rate, though investors should monitor whether this is sustainable given the cyclicality of input costs.

KRT's capital expenditures have been consistently modest, ranging from 0.1% to 2.2% of revenue, with no significant spikes. This suggests that the company's growth is not heavily reliant on heavy asset investment, which is typical for a distributor with a hybrid manufacturing model. The low capex relative to depreciation (D&A averages around $5M per quarter) implies that maintenance capex is minimal, and the company may be under-investing in capacity expansion, but this also supports robust FCF.

The working capital line has been highly volatile, with outflows in most quarters, particularly in 2025Q3 and 2025Q4, which likely reflect inventory builds ahead of peak demand or supply chain disruptions. In 2026Q2, the working capital change was -$3.2M, a smaller drag than prior quarters, suggesting improved efficiency. The company's inventory levels, which are a significant portion of assets, warrant close monitoring for potential obsolescence, especially given the regulatory risks around certain plastics.

Dividends have been consistently paid at $9.0M per quarter in recent periods, up from $6-8M in 2024, and they consume a significant portion of FCF, especially in quarters with lower cash generation. The company has not engaged in significant buybacks, with only a $3.0M repurchase in 2025Q4. This conservative deployment suggests management prioritizes returning cash to shareholders while maintaining a fortress balance sheet, but it also limits flexibility for large acquisitions or organic investments.

The cumulative OCF/NI ratio of 1.26 over the period suggests that KRT's earnings are of high quality, with cash flows consistently outpacing net income. This divergence is partly due to non-cash charges like D&A and SBC, but also reflects efficient working capital management over the long term. The only quarter with a significant negative divergence was 2025Q3, which appears to be an outlier. This pattern supports the view that the company's reported profitability is not overstated.