In the last blog, we began understanding the CFS. In today's blog we continue with the attempt began.
We learnt that generally cash flows could be classified as being from one of - operating, investing or financing activities. The relative proportion of the cash heads give a good insight into the functioning of the company. If the largest portion of the cash flow is from operations, it indicates that the operations are generating business and that there is enough money to buy new inventory. As an investor, he would be keen to see that the amount of cash available to the company should be plentiful to cover that future loan expense.
One needs to remember that the final cash flow doesn’t always look healthy, it could be negative too!
Is it always bad to have a negative cash flow? - Well one can really not decide this by just the numbers. One need to see if this negative cash flow is due to the company's expansion plans. If it’s so, then it might be really better for company that this cash flow has taken place. So an investor needs to open up and look at the details before jumping into any take on the company's cash flow.
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