Discussion – Cash Flow and Stock Price
The increase in cash does not hinge entirely on the cash flow and the generated income. A company has a diversified source of income. However, cash flow and income tend to be the primary sources of cash associated with a company. During operations, a firm may face an injection of additional funds in the form of capital from shareholders or a loan from a lending institution. In some cases, the increase in cash flow may result from the sale of an asset or the recovery of bad debt (Gay, 2016). The occurrence of either of the two outcomes points directly to the expected adjustment in the cash situation. Besides, the injection of either of the models of cash does not align with the defined periods of the financial season (Ball et al., 2016). Also, experience such increases points to a potential improvement in the expectations of the firm. Their inclusion may not list among the interests of the organization from an income perspective but will have a positive influence on the cash position.
The participation of the shareholders in boosting the financial position of the firm or the inclusion of a financial injection preposition from a money lending institution manifests a sense of confidence in the operations of the firm. Primarily, stock prices tend to have their levels defined by traits such as the interests of the shareholders and the anticipated performance of the firm, among other factors. There exists a potential expectation that the manifested confidence in the operations of the firm will have a beneficial influence on the stock value. As a result, the expectations of the stock prices may comprise an upward trajectory despite the company having a poor performance in income generation and cash flow status (Campbell, 2015). Nonetheless, the firm may face substantial challenges upholding such stock performance in the long run following periods of dismal net income generation.
References
Ball, R., Gerakos, J., Linnainmaa, J. T., & Nikolaev, V. (2016). Accruals, cash flows, and operating profitability in the cross section of stock returns. Journal of Financial Economics, 121(1), 28-45.
Campbell, J. L. (2015). The fair value of cash flow hedges, future profitability, and stock returns. Contemporary Accounting Research, 32(1), 243-279.
Gay, R. D. (2016). Effect of macroeconomic variables on stock market returns for four emerging economies: Brazil, Russia, India, and China. The International Business & Economics Research Journal (Online), 15(3), 119.
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Discussion – Cash Flow and Stock Price
Examine if it is possible for a company that has negative net income and negative operating cash flow to end the year with an increase in cash and an increase in stock price. Explain your answer.
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