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Cash flow analysis helps an analyst to identify certain financial difficulties which cannot be identified using the above ratios. A firm may be shown as highly profitable when we analyze it using financial indicators such as profitability ratios, turnover ratios and liquidity ratios but by a study of cash flow of the company we may find that there is hardly any cash or working capital to continue the operating cycle. On the other hand, a heavily loss-making firm may have sufficient cash flows. An analysis of cash flow statement helps an analyst in finding out how flexible a firm is.
To further asses a company, discretionary cash flow also can be computed. Discretionary cash flow is calculated by deducting capital expenditures from operational cash flow. Operational cash flow is arrived at by substracting increase in adjusted working capital from basic cash flow.
Another ratio which can be used to assess the company's cash flow is the cash flow from operations to capital expenditure ratio. This ratio is more useful for capital intensive firms. The higher the value, greater is the financial flexibility of the firm.
Techiniques of capm Effects of capm
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