![]() ![]() This is not a good sign for shareholders, and the company needs to re-look its business model and operating efficiency.Statement of cash flows presents inflows and outflows of cash and cash equivalents and is dealt with in IAS 7. In contrast, a general decrease in cash flow margins across a period means that the company is declining in profitability. This is a good sign for shareholders as it means that the company is becoming more self-sustainable in generating profits for shareholders. When we compare a company’s cash flow margins across quarters/years, we will be able to tell its trend of profitability.Ī general increase in cash flow margins across a period means that the company is increasing its level of profitability. Company A gets more cash flow for the same amount of revenue, which can be used to further expand its business without relying much on external financing. The quality of revenue for Company A is higher as compared to Company B. ![]() Imagine there are two companies that are competitors – Company A and Company B.įor every $1 of revenue that Company A earns, it generates $0.30 in operating cash flow.Ĭontrast this with Company B which generates only $0.10 in operating cash flow for every $1 of revenue. Likewise, a lower cash flow margin means that the company is relatively less profitable in its industry.Ī higher cash flow margin is an indication that the company could be enjoying a higher quality of revenue as compared to its peers and competitors. If the company has a higher cash flow margin compared to its peers and competitors, it means that it relatively more profitable in its industry.
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