LIMITATIONS OF CASH FLOW ANALYSIS
Even if cash flow analysis is one of the best tools for investors to find out whether a company is doing well or not, cash flow analysis also has few disadvantages. We will have a look at them one by one.
One of the most significant things about cash flow analysis is that it doesn’t take into account any growth in cash flow statement. The cash flow statement always shows what happened in the past. But past information may not be able to portray the right information about a company for investors who are interested in investing into the company. For example, if the company has invested a large amount of cash into R&D and would generate a huge amount of cash through its ground-breaking idea, these should come in the cash flow statement (but they don’t get included in the cash flow).
Another disadvantage about cash flow statement is this – it can’t be easily interpreted. If you ask any investor to interpret the cash flow statement, he wouldn’t be able to understand much without the help of the income statement and the other information about transactions occurred throughout the period. For example, it’s difficult to understand from cash flow statement whether a company is paying off its debt or investing more in assets.
Cash Flow Statement is inappropriate if you want to understand the profitability of the firm because, in cash flow statement, non-cash items are not taken into account. Thus, all the profits are deducted and all the losses are added back to get the actual cash inflow or outflow.
Cash Flow Statement is articulated on the basis of cash basis of accounting and it completely ignores accrual concept of accounting. In closing this is my accounting DD.
Long ACBFF GLTA
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