It is incorrect to make holistic conclusions about a company after looking at only one of...

It is incorrect to make holistic conclusions about a company after looking at only one of the three financial documents. Prove this by giving one example to disprove each of the following statements:

• A company, DOPE Inc., claims it has been performing really well because last cash flow statement shows a remarkably high positive cash flow.

• Mr. BLING, who is an entrepreneur with a really high net worth, must be so rich (i.e. has so much cash at hand).

• LIT L.L.C., a private consultation start-up in the smart grid industry, must be failing because its EBITDA over the last three years have been reported as zero.

• A land developer company LONO, must be in good financial health because they recently purchased 1,000 acres of land.

Expert Solution

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Case1: it is not necessary that if a company is having high positive cash flow then, it has been performing really well. We can't say this only seeing it's cash flow.

For example: If a company has high debt ratios, your revenue is not growing, profitability ratios are not high, then it has not been performing really well.

Case2: we can't say entrepreneur must have so much cash at hand just because he has a high net worth.

For example: if the person has invested his money in different projects, its assets other than cash in hand are high, then his net worth will be more even if his cash in hand is low.

Case 3: just because the private consultation has zero EBITDA over the last 3 years, then it must be failing, because it does not include the working capital of the company. Moreover it is the short-term concept.

Eg: there are chances that if the working capital of a company is good, but still EBITDA is zero, and thus, EBITDA cannot decide whether a company is failing or not.

Case4: it is not necessary that a company is in good financial health just because they purchased 1000 acres of land.

Eg: if a company used outside debt to purchase the land, then there are fat chances that its financial health is not good.

keosha answered 11 months ago

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