ACCOUNTING AND FINANCE

IE code:
DF2-138-I
Language:   English
also available in Spanish
Format:  
PDF
Nr. Of Pages:
13
Academic Area:
Type of publication:
Technical Note

Description

This technical note takes a look at how although profit has become the indicator par excellence of business management, the capacity to generate money is a better indicator of a company’s management. It delves into the financial information of two almost identical companies to try to judge their outlook. It proves that by only looking at the profit, you cannot see which one is better but by looking at the cash flow, one company produce money earlier than the other; with an interest rate of 7%, one company offers a value that is much higher than the other company despite the fact that the profits and accrued CF are the same in each case. The material explains that profit cannot be trusted because it is not always available and accounts are open to interpretation but cash is tangible and CF can be reinvested. In a nutshell, we must look more in depth into the profit and loss account and balance sheet to obtain the variation in cash on hand in order to see how much money we need to invest to maintain the business adequately, how much money is due to investors and how much is really paid to bankers and shareholders.