Understanding cash flow
Cash flow is the amount of cash generated from all sources within a specific period of time. Cash can be generated by the following:
- from operations
- from owners’ equity
- from loans
- from investing
- from one-time activity such as an asset sale
Cash flow and Profit is not the same. Cash flow is the money that flows in and out of the firm from operations, financing activities, and investing activities. Profit, also called net income, is what remains from sales revenue after all the firm's expenses are subtracted. Companies can make a profit but still have a negative cash flow and not be able to pay its financial obligation and soon run into serious troubles when more of their creditors becoming worry and demand debts settlement and more suppliers demand cash settlement upon delievery.
Cash rich just means that in the short term the company has very strong ability to meet its financial obligations meet payroll, pay suppliers, meet debt payments and make future dividend distributions to shareholders.
Some companies are rich cash due to more owner's equity, loan, or asset sale instead of accumulation of good cash from operations.
A good company may not necessary has to be cash rich; but it must have good net income, good cash flow from operations, good visibility of future earning growth and has been consistently returning excess cash to shareholders as dividends or special dividends instead of hoarding so much cash to become a cash rich company.