Company one appears to be a company that is just
beginning its cycle which is evident based on its rapid growth and its
characteristic of short falls in operations and purchases of fixed assets
financed by long-term debt or new owner investment (Dugan, M., Gup, B., Samson,
W. 1991). Company two seems like a
company who has reached the end of its cycle due to the characteristic of
having negative operating cash flows and distributing cash to shareholders and
for repaying debts. Company 2 is also
selling off long-term assets and appears to be downsizing because of a
reduction in owner’s equity or liabilities (Dugan, M., Gup, B., Samson, W.
1991). The poor cashflows from
operations suggest that the company will not be in play much longer. Company three is expanding but at a slower
pace. Operating activities are not
generating enough cashflow to satisfy the company’s expansion. Therefore, the progression of the company
must be financed in-part by issuing stocks or debt (Dugan, M., Gup, B., Samson,
W. 1991). This is a normal characteristic of many
growing companies, but this patter also suggest that this is a company
approaching its stage a maturity.
Rating these three companies by risk, company one would
be considered a moderate risk. It is a
new company with much potential but also has more room from error. Company two would be a high risk as it seems
to be on it’s way out of business and will be unable to generate returns. Company three would be a lower risk to
investment as it is an older more mature company which already has a foot hold
in its industry, but will soon reach the state a maturity of where gains will
not be as generous.
In terms of safety, company three would be the safest investment but in
return gains would be limited. Company
one offers there greatest opportunity of the three companies. Even though the operating cashflows of
company one are not sufficient enough to support its expansion, it is in the
beginning stages of the business cycle therefore, has much room form growth. Investors see this and believe that the
future inflows of operations will be great enough to provide profit once the
company becomes more established.
M. T., Gup, B. E., & Samson, W. D. (1991).
Teaching the Statement of Cash Flows (Vol. 9).
Journal of Accounting Education.