Many sophisticated investors and analysts consider the Statement of Cash Flows t
ID: 2791490 • Letter: M
Question
Many sophisticated investors and analysts consider the Statement of Cash Flows to be the most informative of the basic financial statements, particularly relative to the Company's ability to generate cash to reinvest in the business Briefly explain the information about the company that an investor [or potential investor] would be able to determine from an analysis of the company's reported Statement of Cash Flows that would not be as easily determinable from the Income Statement or Balance sheet. Include in your response an explanation of why you would you find this information relevant to your investment decision.Explanation / Answer
In company's income statement an investor or analyst will find information about company's revenue, its cost and how much profit company is making in a time period
In balance sheet it contains information about company's assets and libilities. What are the company's assets that it is using to generate profits, what are its liabilities i.e. debts and equity
In cash flow statement, it contains the information about company's cash. It tells how company is generating cash i.e. from operations, investing decision or financing. It is most informative as it gives us information about company's cash genereating activites. Company will need cash to operate, to pay its employees, to pay for its day to day activities.
A company can generate revenue by increase its accounts recivable but that would not able to generate cash in near term to pay for its operations. Income statement can be manuipulated by accounting decision of company but cash flow can not. Cash flow statement also does not contain non cash expense and incomes. It exclude all of them to reach how much cash does company has. It tells the cash generating capacity of business. It is also difficult to manipulate cash flow statement as compare to income statement.
Cash flow statemet also tells whether company is generating cash from its operations or not. It can be possible that company is profitable but is not generating cash from its operations and its is raising it from financing that would not be a good sign. It also tells how longer company will last with the current amount of cash.
To value company we also use its free cash flow and discount it to reach at the particular valuation of the company.
These information are relevant to investors as a company with profits and without cash will not be able to survive for longer. It is necessary to judge company's capabilties to pay for its day to day operations as an investor. If a company is not able to pay for its operations then it will not be able to survive longer. Day to day operations like paying to its employees, vendors etc. As an investor it is very important to judge company's cash generating capacity ffrom its business as business runs from cash. Analyst can use this information to reach at the free cash flow of the company and value it accordingly.
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