If any Fools still wonder why we emphasize generation of free cash flow over profits according to generally accepted accounting principles when valuing companies, take a look at:

Oil-Dri shows how a company that goes GAAP-profits negative in a single quarter -- and throws Wall Street for a loop as a result -- may simultaneously give attentive Fools a clue to future GAAP profits on its cash flow statement. Back in September, a one-time charge to settle a patent dispute knocked Oil-Dri into the red, under generally accepted accounting principles. Investors who focused on that brief moment of unprofitability, however, might well have not seen that Oil-Dri had generated roughly $12 million in FCF in fiscal 2004.

That level of real cash profitability can't stay off the balance sheet for long. Ultimately, it shows itself in the form of cold, hard cash in the bank and GAAP profits on the income statement. And once it shows up on the latter, you can get the kind of 20% run-up in share price that Oil-Dri shareholders have enjoyed over the past five months.

Speaking of which, Oil-Dri published its fiscal 2005 second-quarter earnings report last week. In all the hubbub of earnings season and the slew of "sexier" companies reporting at the same time, we didn't get a chance to say much of anything about Oil-Dri. Let's rectify that today.

Although I respect Oil-Dri as a business, the company isn't great at giving investors the kind of information that Fools like to see. Since it doesn't provide cash flow statements with its earnings releases, we have to wait and get this crucial information from its Securities and Exchange Commission filing.

However, from the data that Oil-Dri does provide, we can still make a rough guess at its FCF year-to-date. Net income for the first six months of fiscal 2005 was $3.4 million. Depreciation and amortization equaled $3.8 million. Capital expenditures clocked in at $4 million. Add D&A to, and subtract capex from, the net income. Then you have a rough idea of FCF for 1H 2005: $3.2 million.

Thus, true to form, Oil-Dri has quickly overcome its usual first-quarter FCF negativity and is already on its way to generating strong net FCF for the rest of this year.

Fool contributor Rich Smith has no position in Oil-Dri.