Cash is the lifeblood of any business. It offers strength, vitality and, flexibility to make investment decisions as well as the fuel to run its growth engine. Moreover, cash shields a company from market turmoil and indicates that profits are being channeled in the right direction.
One must go beyond profit numbers and look at a company’s efficiency in generating cash flows to invest in the right stocks. This is because even a profit-making company can have a dearth of cash flow and fail to meet its obligations. However, a company’s resiliency can be fairly judged when its efficacy in generating cash flows is assessed.
Particularly, uncertainties in the global economy, market disruptions, and dislocations as well as liquidity concerns that resulted from the coronavirus pandemic have all the more established the relevance of analyzing a company’s cash-generating efficiency.
To figure out this efficiency, one needs to consider a company’s financial flow. While in any business cash moves in and out, it is net cash flow that explains how much money a company is generating.
If a company is experiencing a positive financial flow then it denotes an increase in its liquid assets, which gives it the means to meet debt obligations, shell out for expenses, reinvest in the business, endure downturns and finally return wealth to shareholders. On the other hand, a negative cash flow indicates a decline in the company’s liquidity, which in turn lowers its flexibility to support these moves.
However, having a positive cash flow merely does not secure a future’s business growth. To ride on the growth curve, a company must have its cash flow increasing because that indicates management’s efficiency in regulating its cash movements and less dependency on outside financing for running its business.
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