Detecting Potential Busted Cash Burners
Detecting potential busted cash burners entails comparing a company's cash flow to its working capital. Let's define those terms first.
A company could be burning cash, meaning that it is spending more cash than it takes in (negative cash flow), even though it reports positive earnings quarter after quarter.
To illustrate, assume that Company A reports a $1,000 sale to Customer B. Further, assume that Company A logs the $1,000 order as shipped, but Customer B hadn't paid for the goods by the end of the quarter (the $1,000 unpaid bill is added to accounts receivables).
Following the rules, Company A records the $1,000 as a completed sale, deducts the product cost and other expenses, and logs the ...