Can a Company Have Positive Cash Flow and Negative Net Income?
Cash flowis the net amount of cash and cash equivalents being transacted in and out of a company in a given period. If a company has positive cash flow, thecompany's liquid assets are increasing. Net incomeis the profit a companyhasearned, orthe income that's remaining after all expenses have been deducted. Net income is commonly referred to as the bottom linesince it sits at the bottom of the income statement.
Yes, there are times when a company can have positive cash flow while reporting negative net income. But first,we'll need to explore how cash flow and net income relate to eachother in the financial viability of the company.
Key Takeaways:
- It is possible for a company to have positive cash flow while reporting negative net income.
- If net income is positive, the company is liquid and profitable.
- If a company has positive cash flow, it means thecompany's liquid assets are increasing.
- A company can post a net loss for a periodbut receive enough cash from borrowing or other cash inflows to offset the loss and createpositive cashflow.
Understanding Net Income and Cash Flow
Net income is calculated by subtracting the costs of doing business, includingexpenses, taxes, depreciation, and interest on debt from total revenue.If net income is positive, the company is liquid and has a higher probability of paying off its debts, paying dividends to shareholders, and paying its operating expenses.
Cash flow is reported on thecash flow statement, which showswhere cash is being received andhow cash is being spent. Cash flowis the net amount of cash and cash equivalents being transacted in and out of a company in a given period. If a company has positive cash flow, it means thecompany's liquid assets are increasing.
Real-World Example of Positive Cash Flowand Negative Net Income
Below is the cash flow statement for JC Penney Inc. (JCP) as of Q2 2018. The company later filed for bankruptcy in the summer of 2020, partly due to its persistent negative cash flow problems.
Looking at the company's filings, net income is carried over from the income statement and is the starting point for calculating cash flow.From the net income amount, cash transactions for the period are eitheradded or subtracted.
- JC Penney had a negative net income (or loss) for the period of $78 million,highlighted in red.
- However, atthe bottom of the statement, highlighted in green, the company posted a positive cash position of $181 million.
How can that be?
- We can see,highlighted in blue,that JC Penney received an influx of cash from borrowings of a credit facility along with additional cash from new long-term debt.
- In otherwords, the company still posted a loss for the periodbut received enough cash from borrowing to offset the loss and createpositive cashflow.
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Remember that the cash flow statement only shows a company's cash position. It'snot a measure of profitability. A company can still post a loss in itsdaily operationsbut havecash available or cash inflows due to various circ*mstances.
Depreciation
Depreciationis an accounting method that allocatesthe cost of a fixed asset over its useful life. Depreciation accountsfor declines in the value of the asset and spreads the expense of itover the years of the useful life of that asset. Depreciation helps companies avoid taking a huge deduction in the year the asset is purchased, allowing companies to earn revenue from the asset.
Net income is calculated by deducting a company's expenses, anddepreciationis one of those expenses. However, sincedepreciation is an accounting measure, it is not an outlay of cash. As a result, depreciation expenseis added back into the cash flow statement when calculatingthe cash flow of a company.
If a company has anet loss for the periodand has a large depreciation expense amount added back into the cash flow statement, the company could record positive cash flow, while simultaneouslyrecordinga loss for the period.
Sale of anAsset
If a companysells an assetor a portion of the company to raise capital, the proceeds from the sale would be an addition to cash for the period. As a result, a company could have a net loss while recording positive cash flow from the sale of the asset if the asset's value exceeded the loss for the period.
Accrued Expenses
Accrued expenses occur when a company records an expense for purchasing an asset but does not have to pay for it until the next period. Expenses are recorded at the time they are incurred, not whenthey arepaid. For example, acompanymightrecord a substantialexpense in Q4 but not have a cash outlay until the next year when the invoice ispaid. As a result,the company might post a net loss inQ4 while maintaining apositive cash position.
When analyzinga company's financial statements, it is important to review all aspects of the company's financial position, includingnet income and cash flow. Only through a comprehensive analysis of all the financial statements can investorsmake an informed decision.
What Does Negative Net Income Mean?
A negative net income means a company has a loss, and not a profit, over a given accounting period. While a company may have positive sales, its expenses and other costs will have exceeded the amount of money taken in as revenue.
What Are Negative vs. Positive Cash Flows?
Cash flows describe the movement of money and liquid assets on and off a company's books as it makes various transactions. Positive cash flows mean that more money is coming in than going out of a company. Negative cash flows imply the opposite: more money is flowing out than coming in.
What Can Cause Negative Net Income With Positive Cash Flows?
Accounting items like depreciation, capitalized costs, or one-time charges can result in a negative net income even if cash flows were net positive for that period.
