Question

Is it possible for a company that has negative net income, negative operating cash flow, and negative free cash flow to end the year with an increase in cash and an increase in stock price? Explain your answer. (Please write between 300-500 words)

Answer 1

We will not be able to write a 300 - 500 word answer here. However, we will definitely help you with the core answer. I have presented below the core answer. Please add some meat, apply your understanding and complete the desired length.

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Yes, it's possible.

The increase / decrease in cash is the result of one more source of cash flows and that is the cash flow from external financing. A firm can raise capital externally in the form of debt, equity or a combination of both, thereby funding all its operating losses and still having surplus good enough to lead to an increase in the cash balance. Thus external capital can help the company land up in situation where there is a net increase in cash, despite having negative net income, negative operating cash flow, and negative free cash flow.

While cash flows positions do impact the share price, please understand that the share price is an outcome of an interplay of various qualitative and quantitative factors. Stock price is reflection of the true potential of the company and not necessarily of its position currently. It's future may be prospective, though it may be running into losses or cash crunch initially. There had been an umpteen number of cases where stock price keeps increasing despite lack of profits or operating cash flows. For example: Most of the internet based companies, e-commerce companies - they all enjoy ever increasing share prices even though they are incurring huge losses or burning huge cash.