When it comes to assessing a company's financial performance, it is essential to look beyond simple net profit.
Although profit is an important indicator, it represents only part of the overall financial picture. For a more complete picture, we recommend that you turn to the cash flow statement.
The cash flow statement provides a detailed analysis of a company's cash inflows and outflows over a given period. It is made up of three main sections: cash flows from operating activities, investing activities and financing activities.
Here are 4 essential reasons for relying on the cash flow statement:
1-Measuring liquidity Unlike net profit, which is based on accounting figures, the cash flow statement focuses on the actual movement of money. It is used to assess a company's ability to generate and retain cash. A company may have a high net profit, but if it does not generate enough positive cash flow, it could face liquidity problems in the long term.
2-Management of working capital : The cash flow statement highlights changes in a company's working capital, i.e. the difference between current assets and current liabilities. Effective management of working capital is crucial to maintaining day-to-day operations, such as paying suppliers, managing stocks and collecting trade receivables. The cash flow statement can be used to identify potential working capital problems and adjust strategies accordingly.
3-Evaluation of investments : When a company is considering investing in new projects or acquiring assets, the cash flow statement provides visibility of future cash flows. It helps to assess whether investments are likely to generate a positive return and whether they are financially viable in the long term. A company may have a high net profit, but if its future cash flows are uncertain, this could indicate a financial risk.
4-Analysis of the capital structure : The cash flow statement also reveals financing activities, such as share issues, loans or repayment of borrowings. This makes it possible to assess the stability of the company's capital structure and its ability to manage its short- and long-term financial obligations.
In short, relying solely on a company's net profit can give an incomplete view of its financial health. The cash flow statement provides a more holistic perspective by focusing on actual cash flows and allowing a more accurate assessment of liquidity, working capital management, investments and capital structure. By taking this information into account, investors, managers and stakeholders can make more informed decisions and gain a better understanding of a company's true financial performance.
