|
What is a company’s cash flow?
Cash flow is the change to cash and cash equivalents over a given time period. Generally, cash flow is the best measure of a company’s profits. It is usually calculated by adding depreciation and any other non-cash charges back to earnings after taxes. Investors look to cash flow because:
- Firms have more accounting leeway when it comes to reporting net income than cash flow.
- Cash flow doesn’t count depreciation charges, which are substantial in many industries but aren’t bills that have to be paid
- Cash flow is the key to a company’s ability to pay dividends, cover debts, and so forth.
Thus, some analysts focus on the ratio of price-to-cash flow rather than the traditional price/earnings (P/E) measure. Cash flow is especially useful in assessing firms in capital-intensive industries -- cable TV, for instance -- in which huge depreciation charges can hide healthy profits.Return to Questions
|
