Question

Sven Broker, an analyst with an established brokerage firm, comments: ?The critical number I look at for any company is operating cash flow. If cash flows are less than earnings, I consider the company to be a poor performer and a poor investment prospect.? Do you agree with this assessment? Why or why not?

please answer the above;

Answer 1

Answer :

Operating cash flow is the cash generated from the business activity of the company and it can derived from below:

Operating Cash Flow = Net Earnings + Non cash expenses such as Depreciation and amortisations - Increase in Working Capital + Decrease in working capital

for the performance of a business operating cash flow is on of the key measures which give a look in the cash generation ability of the business and if business is generating enough cash or operating cash flow in positive it has good future prospects.

While taking decision on merely focused on operating cash flows can not be right all the time so it is advisable to look or pay attention on the other financials figures which is also helpful in recognise or check the performance of the business.

there are factors by which company operation cash flow can be negative :

if company has invested large amount more than the average in their inventories due to minimise the cost then operating cash flow for that particular period in negative but company has good prospects to enhance its profitability.

if company got big order and sale the goods to one customer and which payment will come in next cycle of cash flow then operating cash flow will be negative and whereas company's financial results will show good net earnings.

No I am not completely agree with this statement and even i have shared some examples/ facts in which operating cash flow will show you the reverse situation. Furthermore I would recommend to look or focus on the profit and loss account and as well earning per share along with operating cash flow while concluding any decision of investment.