1. By giving example to each, mention types of current assets:
Types of Current Assets:
- Cash and cash equivalent
- Inventory
- Ongoing projects
- Pre-paid expenses
- Account receivable
- Marketable securities
Examples of Current Assets
- Cash and equivalents
- Short-term investments (marketable securities)
- Accounts receivable
- Inventory
- Prepaid expenses
- Any other liquid assets
2. Explain three types of cash flows
Cash flows refer to the movement of money into or out of a business or financial system. They are crucial for assessing a company's financial health and performance. There are three main types of cash flows: operating, investing, and financing.
1. Operating Cash Flow (OCF):
- Definition: Operating cash flow represents the cash generated or used by a company's core business operations. It reflects the company's ability to generate cash from its regular business activities.
- Components: OCF includes cash received from customers, payments to suppliers, employee salaries, and other operating expenses.
- Significance: Positive operating cash flow is generally a sign of a healthy and sustainable business model. It indicates that the company can generate enough cash from its day-to-day operations to cover its expenses and reinvest in the business.
2. Investing Cash Flow (ICF):
- Definition: Investing cash flow represents the cash transactions related to the purchase and sale of long-term assets, such as property, equipment, or investments in securities.
- Components: ICF includes cash spent on acquiring new assets and cash received from the sale of existing assets.
- Significance: A positive investing cash flow may indicate that the company is making strategic investments for future growth. On the other hand, consistently negative investing cash flow may suggest that the company is divesting or reducing its asset base.
3. Financing Cash Flow (FCF):
- Definition: Financing cash flow reflects the cash transactions between a company and its investors or creditors. It represents the cash used for raising capital or repaying debt.
- Components: FCF includes cash received from issuing stocks or bonds, as well as cash paid for dividends, debt repayment, or stock buybacks.
- Significance: Positive financing cash flow may indicate that the company is raising funds to support its operations or expansion. Negative financing cash flow may signify that the company is paying off debts or returning capital to shareholders.
Understanding and analyzing these three types of cash flows collectively provides a comprehensive view of a company's financial performance and how it manages its cash resources. Financial analysts and investors use these cash flow categories to assess a company's liquidity, solvency, and overall financial health.
3. The best investment decisions is based on cash flows or the profits of the company? Discuss
The assessment of the best investment decisions based on cash flows or profits depends on the specific goals, preferences, and investment strategies of the investor. Both cash flows and profits provide valuable insights into a company's financial health, but they represent different aspects of its performance. Here are key considerations for each:
Investment Decisions Based on Cash Flows:
1. Liquidity and Sustainability: Cash flows are a direct measure of a company's liquidity—its ability to meet short-term obligations. Positive operating cash flow ensures that a company can cover its day-to-day expenses, repay debts, and make necessary investments.
2. Flexibility and Adaptability: Cash flows provide a more flexible and adaptable metric for investors. While profits are subject to accounting rules and may include non-cash items, cash flows focus on the actual movement of cash in and out of the business, offering a clearer picture of the company's ability to generate and manage cash.
3. Investment for Growth: Investors often pay attention to a company's free cash flow, which represents the cash available after covering operating and capital expenses. Positive free cash flow indicates that a company has funds available for potential growth opportunities, acquisitions, or returning value to shareholders through dividends or share buybacks.
Investment Decisions Based on Profits:
1. Profitability and Performance: Profits, especially net income, are key indicators of a company's overall profitability. Investors may be interested in a company that consistently generates profits as a sign of its ability to create value for shareholders.
2. Earnings Per Share (EPS): Profits are often used to calculate earnings per share (EPS), a crucial metric for investors. Higher EPS can attract investors and contribute to stock price appreciation.
3. Valuation Metrics: Many valuation metrics, such as price-to-earnings (P/E) ratio, are based on profits. Investors use these ratios to assess a company's relative value compared to its earnings.
Considerations for Investors:
1. Comprehensive Analysis: Ideally, investors should consider both cash flows and profits in their analysis. A comprehensive approach that includes assessing a company's income statement, cash flow statement, and balance sheet provides a more holistic view.
2. Industry and Company Dynamics: The significance of cash flows versus profits can vary across industries and companies. Some industries may prioritize cash flows due to capital-intensive nature, while others may place more emphasis on profits.
3. Investment Horizon and Goals: Investors with a short-term focus or income-oriented goals might prioritize profits, while those with a long-term perspective might value a company's ability to generate consistent and positive cash flows.
In conclusion, the best investment decisions often involve a balanced consideration of both cash flows and profits. Investors should evaluate the specific context of the company, industry dynamics, and their own investment goals before making decisions based solely on one metric over the other.
