Cash-flow tells a story : how can cash-flow patterns assist analysts in investigating a company's financial health?
Date
2008-02
Authors
Steyn Bruwer, Wilma
Hamman, Willie
Journal Title
Journal ISSN
Volume Title
Publisher
Stellenbosch : University of Stellenbosch Business School
Abstract
Cash has been called the lifeblood of
a business. A company’s ability to
generate cash from its activities is a
critical determinant of its survival
and growth. Moreover, companies
that consume cash consistently are on the way
to disaster.
This makes the cash-flow statement a vital set
of information for assessing financial health. It
reveals a company’s ability to generate sufficient
cash to repay loans, to fund expansion and to
pay dividends, and also enables analysts to
understand how much profit is realised in cash.
Past research has established that there are
distinct cash-flow patterns that can be
associated with the life-cycle phases of
companies. Life-cycle theory suggests that
companies go through phases of start-up,
growth, maturity and decline. In each phase they
face different operational circumstances which
give rise to different cash-flow patterns.
This research, conducted at the University of
Stellenbosch Business School (USB), used
empirical data to show how analysts can study a
company’s cash-related variables and ratios and,
by comparing them with expected patterns, gain
a broader understanding of the company and its
relative level of maturity. The study found that
listed South African industrial companies
displayed predictable occurrences of cash-flow
patterns associated with start-up, growing and
mature enterprises. It also found that certain
patterns are only sustainable over short periods.
Companies exhibiting these are at the end of
their life cycle, and will either disappear or be
restructured.
Description
Keywords
Cash-flow, Corporations -- Finance