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Chief
Of course - a company could be borrowing to have positive cash flow but still have negative net income.
Exactly — their core operations are getting worse due to low sales to, for instance customers not interested or perhaps obsolescence. However, the firm can still have a strong balance sheet. For instance, they have great assets. Bank A will loan them x amount of fund because, at the end of the day they can pay it back.
Or, company is cyclical. For instance take a mining company, that does a lot of exploration. They might have cash due to equity investment or debt financing. They do not have any profit or better yet they, they have a loss.
Happy to walk you through more interesting scenarios
Ever heard of a ponzi scheme?
Pro
Exactly – Network Marketing.
Of course, they could be borrowing money or selling off their assets.
Chief
Of course? Why do you ask...?
Kind of a red flag tho. Would have to look into how they have positive cf if in financial distress…is it from sustainable sources?
Definitely. But a prime reason why cash flow can be misleading.
Others have mentioned it, but taking on debt is positive cash flow.
Pro
Exactly — one needs to analyze all 3 statements. That’s why financial modeling for all 3 statements is paramount for answering these questions. Grasping these contexts will not come easy unless one commits and is close to the business.
Yes, a company could be showing positive cash flow while foresaking medium and long term investments that would be needed to continue positive cash flow. i.e. - The house is super warm, but you've stopped chopping wood in favor of burning more. Works for now, but does not bode well for the future.
Pro
Great analogy here!
Thank you. 😊
There’s lots of reasons this could be happening. Some of them can actually mean the company is doing well and just not managing their assets correctly. I worked for one company that had strong growth and still had to declare bankruptcy. I was called in because they didn’t understand why that could happen.
Let me give a few examples:
1. Heavy Capital Expenditures: the company I worked for was opening lots of retail stores. More than one a month. The cost of each store put strain on their financial resources, despite positive cash flow.
2. Poor mgt of Working Capital: they were growing so fast that they needed to buy more inventory, which got caught up between china and the US. If the companies cash is tied up in inventory still in transit, liquidity issues can make it difficult to meet other obligations, despite positive cash flows.
The solution was to bring in more investors with cash to help with growth.