Is this statement true?

A company can usually survive for a time without earnings as long as cash flow from operations covers expenses and provides funds for growth.

Doesn't operations profit come from gross profit? Can anyone provide a mini income statement example of why the above is true?

  • 1
    What is the source of the statement? – Chris W. Rea May 4 '14 at 16:23
  • @JBKing your statement is irrelevant , Amazon.com got VC to invest in them , the OP is asking how can there be cash flow from operations when there is no earning – Computernerd May 4 '14 at 17:45

It is true that operation profit comes from gross profit however it is possible for a company to have negative net profit yet have postive cash flow , it has to do with the accounting practice

A possible example is that a company has extremely high depreciation expense of fixed asset hence net profit will be negative but cash flow will be positive. Assuming the fixed asset has been fully paid for in earlier years

  • Would you agree that the statement (from the OP) seems to have narrow application? – 4thSpace May 4 '14 at 23:38

It depends on the definition of earnings. A company could have revenue that nets in excess of expenses, so from that perspective a good cash flow or EBITDA, but have debt servicing costs, taxes, depreciation, amortization, that alters that perspective.

So if a company is carrying a large debt load, then the bondholders are in the position to capture any excess revenues through debt service payments and the company is in a negative equity positions (no equity or dividends payable to shareholders) and has not produced earnings.

If a company has valuable preferred shares issued and outstanding, then depending on the earnings definition, there may be no earnings (for the common stock) until the preferences are satisfied by the returns.

So while the venture itself (revenues minus costs) could be cash flow positive, this may not be sufficient to produce "earnings" for shareholders, whose claim on the company still entitles them to zero current liquidation value (i.e. they get nothing if the company dissolves immediately - all value goes to bondholders or preferred). It could also be that taxes are eating into revenue, or the depreciation of key assets is greater than the excess of revenues over costs (e.g. a bike rental company by the beach makes money on a weekly basis but is rusting out half its stock every 3 months and replacement costs will overwhelm the operating revenues).

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