Why cash flow is king
And not just in the current market environment.
From Livewire
From time to time, companies pull the wool over investors' eyes, "cooking the books" to convince investors things are far better despite a worsening economic environment.
According to a US-based accounting society, there are 10 ways companies may distort their financial results.
These include, but are not limited to, improper revenue recognition schemes (when a company shifts revenue from one period to another), fictitious revenue (when it recognises revenue related to fake contracts or nonexistent sales), channel stuffing (when a company inflates sales by sending excessive amounts of products to distributors ahead of demand), third-party transactions (the non-kosher kind), the improper capitalisation of expenses (overstating net income and understating expenses), and more.
Cash flow, however, is vastly more simple.
"Cash flow is a lot purer than revenue or earnings. To some extent, you can just buy revenue and earnings and overexpand. Cash flow is really what's left after having actually paid all your bills and funded what you need to do to sustain the business," L1 Capital International's David Steinthal said.
It's also "fundamentally important" to the valuation of businesses, Steinthal argues.
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