Question

When it comes to analyzing a potential company, cash flow analysis plays an extremely important role in the analysis. These cash flows can be positive and in many cases such as Tesla be negative hoping that the company will turnaround. A reasonable assessment needs to be done, which involves the all-important cash flow analysis outlined in the chapter. Analysis such as cost, risk are key components just to name a couple areas. What do you feel is one of the important benefits and one concern of cash flow analysis citing your reason. Try to include a real example.

Answer 1

One of the most important benefits of cash flow analysis is-

1.Complete blueprint of cash flows associated with a company- It gives an idea about the current status of cash available to a company and how liquid it is to fund it's obligations and what is the estimated probability of the company triggering a default on it's loan.It is a complete blueprint of cash generated and how effectively it is being used to fund it's operating expenses and debt repayment obligation.

One of the concerns of cash flow analysis is-

1.It can be based upon a lots of assumptions- Cash flow statement is based upon a lot of expectations as expenses are recognised on prudent basis and income are mostly recognised on receipts basis and there is a very high probability of it showing a lot of assumptions based figures than real figures and many companies are not reflecting the true and fair view of cash flows as it is dependent upon flawed assumpted values and many growing companies get unnecessarily penalized for this shortcoming of cash flows analysis.