Why can't you assume that a company is financially healthy and liquid if it has positive...

Why can't you assume that a company is financially healthy and liquid if it has positive cash flow?

Expert Solution

Positive cash flow maybe for various reasons such issue of shares and sale of machine or sale of investment.

A business having loss from operations may have positive cash flow due to issue of bonds or taking long term loan. We know that a loss is bad for any business but negative cash flow may not be as bad.

Negative cash flow because of purchase of asset is a sign of growth and a cue that company is exciting it's business.

Positive cash from operations on the other hand can be taken as a good sign. But overall positive cash flow does not tell that company is financially healthy.

Not paying creditors and suppliers is a sign of bad finantial position even in positive cash . A company must have enough cash to support its operations and should be able to meet short term cash obligations.

Conclusion

We cannot assume that a company is financially healthy and liquid if it had positive cash flows.

ekkarill92 answered 2 years ago

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