Cash-flow tells a story : how can cash-flow patterns assist analysts in investigating a company's financial health?

Cash has been called the lifeblood ofa business. A company’s ability togenerate cash from its activities is acritical determinant of its survivaland growth. Moreover, companiesthat consume cash consistently are on the wayto disaster.This makes the cash-flow statement a vital setof information for assessing financial health. Itreveals a company’s ability to generate sufficientcash to repay loans, to fund expansion and topay dividends, and also enables analysts tounderstand how much profit is realised in cash.Past research has established that there aredistinct cash-flow patterns that can beassociated with the life-cycle phases ofcompanies. Life-cycle theory suggests thatcompanies go through phases of start-up,growth, maturity and decline. In each phase theyface different operational circumstances whichgive rise to different cash-flow patterns.This research, conducted at the University ofStellenbosch Business School (USB), usedempirical data to show how analysts can study acompany’s cash-related variables and ratios and,by comparing them with expected patterns, gaina broader understanding of the company and itsrelative level of maturity. The study found thatlisted South African industrial companiesdisplayed predictable occurrences of cash-flowpatterns associated with start-up, growing andmature enterprises. It also found that certainpatterns are only sustainable over short periods.Companies exhibiting these are at the end oftheir life cycle, and will either disappear or berestructured.