Alternative approach to financial statement analysis Asked what she looked for when analysing a company’s financial statements, a prominent fund manager, Florence Cash, gave a two-word reply: ‘Cash flow’. Florence then elaborated: ‘When evaluating a company, I don’t spend time calculating profit margins or return on capital employed or any of the other traditional ratios favoured by financial analysts. The two questions that most concern me are:

(1) Does the company generate positive free cash flow? and (2) Is free cash flow growing? I use these cash flow questions as a screening device. Only if the answer to both is yes, will I consider the company a candidate for investment and investigate it further.’

Required Comment on Florence’s approach to analysing financial statements. What are the advantages and disadvantages of this approach?

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