I'm looking at the WSO PE Interview Prep Course technical questions and #3 asks:
"Tell me why each of the financial statements by itself is inadequate for evaluating a company?"
One of the two reasons the guide states for the CFS:
"The cash flow statement won’t tell you whether the company’s ongoing operations are actually profitable because cash flows in any given period could look strong or weak due to timing rather than the underlying strength of the company’s business."
I understand that the cash flow statement would not reflect the profitability margins of the company, but this has nothing to do with the timing of operating cash flows. Because CFO starts with Net Income, one could see how much of the operating cash flow in this period comes from operating profit earned in this period, increases in working liabilities, and decreases in working assets, so that the inability to distinguish timing of cash flows does not seem to be a reason that the cash flow statement is inadequate for evaluating a company.
Am I missing something here? Thanks.
Just spitballing here, but one idea is that with just the cash flow statement, you don't know much about the company's operating/cash-conversion cycles. With the other statements, you can figure out days sales outstanding, inventory turnover days, and days payable outstanding, which all help assess how effective the company is at selling goods and collecting cash, and at delaying payments to suppliers. This might be what the explanation means by 'timing'.
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