This may seem like a silly question to ask, since you would assume that a company needs to turn a profit in order to stay afloat and keep its business intact. However, that doesn’t necessarily have to be the case. Remember that a profit in accounting terms includes non-cash items like depreciation, which in some cases can add up to a lot.
Cash is ultimately what will keep a company’s operations running, not paper gains, and that’s why a statement of cash flow is often more important in assessing the financial health of a company than its bottom line.
Take for instance, Amazon.com, Inc. (NASDAQ:AMZN), which trades at a multiple of more than 300 times its earnings. It may seem concerning that a company with $178 billion in revenue for 2017 only netted $3 billion of that as profit, or about 2% of its top line.
However, if you look at the company’s cash flow from operations, it generated $18 billion, more than 10% of sales. The big reason is again, non-cash items like depreciation that are eroding a significant chunk of the company’s profits but that really have no real impact on the company’s long-term success.
This is where investing can get a little complicated, because while profits are important and a useful benchmark, they can easily mislead investors. Big gains or losses from non-operational items can turn a bad quarter into a good quarter, and vice versa.
Cash flow, however, is able to give you a more accurate picture of the company’s overall health.
