Question
In: Finance
If you want to invest in a company and you noticed that the company’s free cash...
If you want to invest in a company and you noticed that the company’s free cash flow or operating cash flow from its assets was negative for the past 3 years, what do you think could be the cause, and how can the company survived for so long time with negative cash flows. Would you invest in this company? Why?
Solutions
Expert Solution
A negative operating cash flow is a can be due to the fact that the company is purchasing higher stock and has given a longer credit period for receivables. Also, the reasons can include that the bad debts have increased, the receivables are not collected on time, the inventory turnover ratio has decreased. The company has probably survived for so long on the reserves it has accumulated over the years and must have been profitable company. Also, having negative cash flows does not necessarily indicate that the company is performing poorly on the financial front. The profits can be good enough, the financing activities and investing activities can be positive and offsetting the negative operating cash flows. An investor can invest in the company based on the past financial health of the company, if there are justified reasons for negative cash flows, future plans of the company to turn the negative to positive cash flows and the revenues of the company.
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