Why isn’t net income sufficient to describe how well a company is doing?

Expert Solution

Net income is not sufficient to show how the company is doing in its overall operations because it is just a measure of overall profits which is generated by the company but it is not showing the adequate risk which has been taken by the company and long-term perspective of the company and exposure to various market fluctuations of the company.

A company will be generating profits after it has it has paid out all the expenses out of the sales revenue and taxation and it is reflecting the profit generation capacity of the company in the short run but it is having no impact for the profit generation of company and cash flow generation of the company in the long run.

A company can be highly profitable but it can also be highly subjected to a lot of market fluctuations and that is not reflected in to the net income so cash flows should also be considered along with long term profitability of the company should also be considered and exposure to market risk should also be considered while determination of the performance of the company.

A company can be highly profitable but it can be prone to insolvency and it can also be prone to liquidity risk in the long run because of its exposure to high debt capital and sensitiveness to the market fluctuations so it can be said that the net income is not the sole representation of the performance of the company.

jeff jeffy answered 2 years ago

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