Thread by @themoneymemo

Net Cash Flow is an important metric many investors look at when researching companies.

But do you know that cash flows can be easily manipulated?

Let's see how:

#investing #finance #FinancialFreedom #Accounting

The Cash Flow Statement is one of the three most important financial statements of a company.

The other two being P&L Statement and the Balance Sheet.

Balance Sheet shows us the assets and liabilities of the company and is very important to look at when analyzing cash flows.

Cash position of a company has an inverse relation with Assets and a direct relation with Liabilities.

For e.g., you BURN cash to acquire an Asset. So when Assets increase, the cash position DECREASES.

On the corollary, an increase in Liabilities INCREASES the cash position.

Many investors don't understand this relationship.

Hence, a fresh debt issue - which is a liability, and not positive for the financial health of the company - actually increases the cash flow on the cash flow statement!

This is extremely important to understand.

#economics

Thus, a company can show a high net cash position just by taking on more debt!

Similarly, acquiring a good asset can reduce the net cash position of a financially healthy company.

This is another loophole in double-side accounting.

#Adani #AdaniOut

How to avoid this bias?

Always study the P&L, Balance Sheet and Cash Flow statements together to form a better context.

Understand the company's debt position very well, because RoE can also be manipulated in the same way.

If you enjoyed this information, consider retweeting the first tweet to get this across to more #investors :)

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